News & Analysis

The bear and the bully: GlaxoSmithKline's internal war on dividends vs stagnant stock price

Andrew Saks, Monday, 21 June 2021

The bears are out in force this morning.

Why the pessimism over such a clearly active company?

Emma Walmsley, CEO of GlaxoSmithKline, has begun to demonstrate the characteristics of an actual bear, showing her teeth in defence after aggressive investors Elliot Management which holds a significant stake worth billions of pounds in the company began to plot to remove her from office.

Ms Walmsley should certainly be held up as a bastion of strong leadership. Whatever the general public opinion is regarding large pharmaceutical companies and their behaviour recently which is equally aggressive, however GlaxoSmithKline has largely stayed out of the enormous propaganda war that is currently being inflicted on the public by the government on behalf of its draconian plan and big pharma profit.

In order to scupper the sudden attempt by Elliot Management to reshuffle the executive team at GlaxoSmithKline, Ms Walmsley has been quickly and effectively making changes to ensure that she is not voted down and that the activist investors would have no grounds to unseat her from her leadership role.

The result should be positive, as Ms Walmsley has, without admitting as much, engaged in a battle against her predators which ordinarily would preserve the company's management team and create stability.

However, today, GlaxoSmithKline stock is down 1.80%, a dip that took place after it came to light that Ms Walmsley had introduced a dividend cut which will reduce the amount receivable by shareholders to give the company a better balance sheet and therefore rejuvenate its stagnant share prices over the past few months.

If she is able to pull that off, shareholder confidence may resume, and Ms Walmsley would be able to defend her position should Elliot Management propose she is removed.

Additionally, Ms Walmsley is planning the spinning off of GlaxoSmithKline's retail consumer section, which includes Sensodyne toothpaste and Panadol pain relief, to run them as separate entities from the company's pharmaceutical and vaccines divisions next year, and then once made into a separate entity, there is a possibility that the newly created consumer products division will be floated on the stock exchange independently.

This week, GlaxoSmithKline executives will unveil a pipeline of promising blockbuster drugs, including treatments for HIV, as well as provide a detailed five-year growth forecast and will outline plans for scientists in the pharmaceutical and vaccines divisions to work more closely together.

As far as Ms Walmsley's dividend cut is concerned, GlaxoSmithKline has consistently paid its shareholders an 80p dividend, representing a £4 billion distribution, annually each year since 2014. The pay-out is expected to be slashed to between 40p and 50p next year. A reduction to 45p would represent a £1.7 billion cut in the annual dividend pool to about £2.3billion.

The main issue faced by Ms Walmsley is that since she assumed her position as CEO in 2017, the company's share price has fallen by 15% overall, which is a metric being used by Elliot Management to oust her.

As it stands, it is understood that Elliot Management has discussed with shareholders the option of making GlaxoSmithKline's vaccine division a separate entity, however several senior executives at the firm have concurred that the company would prefer to maintain a close collaboration between the main pharmaceutical division and the vaccine division.

Aside from last week's announcement by GlaxoSmithKline that it will be purchasing iTeos Therapeutics, the North American cancer treatment company for $2 billion, it is currently considered unlikely that any further acquisitions will be on the cards in the immediate future.

Analysts at Morgan Stanley, which has a £15.50 target price told mainstream British media this morning "The key question for investors is whether the pace of change is fast enough as the business gradually evolves into a more innovative, specialist medicines operation, potentially generating higher and more sustainable returns."

Some say that GlaxoSmithKline needs a venture capitalist to inject some cash and run the business properly, but thats what it got with Elliot Management, which is acting against the board. Other members of the public have been as extreme as to consider this move to be an act of 'stealing from shareholders', but that is stretching things way too far.

One trader said "That's a rather unique way of looking at it. Surely it's the company's money to do with as it sees fit. If it wants to increase capital growth through expansion, then that sounds reasonable. If you are disgruntled about no longer receiving such a generous dividend, maybe you could drop Emma Walmsley a line. Maybe she will change her mind. The shareholders own & are the company. When the initial commenter retaliated to that comment by saying "Perhaps you should have bought it this year!", the trader in question said, "I did".

Given this curiosity, it is still interesting that there is no volatility in GlaxoSmithKline stock.

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