Early this year, I was closely following the share price of GlaxoSmithKline (LSE: GSK). Having peaked at 1,857p on 24 January 2020, the GSK share price collapsed. On Friday, 26 February 2021, the FTSE 100 stock closed below 1,191p. That’s a loss of over 666p — more than a third (35.9%) — in 13 months. Given that GSK is my largest personal shareholding, this was rather unpleasant for me.
The GSK share price drops to 10-year lows
With the GSK share price at lows not seen in a decade, I felt strongly that they were a bargain. On the very next day (Saturday, 26 February 2021), I said that GSK was among the cheapest of cheap shares in the Footsie. Back then, GSK shares traded on a price-to-earnings ratio of 10.6 and an earnings yield of 9.4%. The dividend yield of 6.7% a year was double that of the wider FTSE 100 index. To me, cheap as chips.
It seemed odd to me that, in the midst of a global pandemic, shares in the world’s #1 vaccine producer had fallen so steeply. Indeed, many of GSK’s Big Pharma rivals’ stocks had soared to new highs. Thus, I concluded that the market had mispriced this unloved and unwanted stock. Hence, instead of selling, I kept reinvesting my quarterly dividends into buying more GSK shares.
GSK shares get a shot in the arm
From February to April, I wrote several articles asking whether I should give up, dump my GSK shares, and move on. However, as a rational, long-term investor, it takes a lot to spook me into selling. Hence, I decided not to sell at such low prices. Furthermore, my wife then bought another chunk of GSK stock at roughly £1 above the late-February low. As I write on Tuesday afternoon, the GSK share price hovers around 1,418.8p. That’s 228p above February’s closing low — a gain of almost a sixth (16%) in 3½ months.
After a 16% recovery, should I sell?
Having added more than 4,000 additional GSK shares to our portfolio since February, is now finally the time to sell? I see two problems with selling our entire stake in this global giant. First, selling such a large shareholding would crystallise hefty capital gains at this improved GSK share price. Deducting the tax-free allowance of £12,300 for the 2021/22 tax year would leave further profits to be taxed at 20%. Ouch.
Second, I regard this FTSE 100 share as a key provider of dividend income for our portfolio. For the past five years (and for 2021/22, most likely), GSK has paid a steady cash dividend of 80p a share. This is paid quarterly and, based on the current GSK share price, equates to a dividend yield exceeding 5.6% a year. Staying within the safety of Footsie mega-stocks, it’s hard to replace such a high income stream without taking on greater levels of risk.
To sum up, my 35 years of investing have taught me this important lesson: act in haste, repent at leisure. In other words, I don’t rush into making snap decisions, because predicting the future is impossible. Then again, GSK has already confirmed that it plans to cut its chunky dividend in 2022. This will happen after it splits into a biopharma and a consumer-healthcare business. At this crucial juncture, I may change my mind about being a GSK shareholder. Until then, I might just sit tight!
Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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