Stock Stories brings you closer to the heart of our investment strategy. In these short videos, our investment team discuss interesting stocks and how they contribute to our objectives of delivering a high and rising income together with capital growth for our shareholders by investing in a diversified portfolio of well-established UK-listed companies.
In this short episode of ‘Stock Stories’, Product Specialist Stephanie Sutton discusses an investment decision that was made and is illustrative of the Trust’s strategy: GSK. Stephanie shares her thoughts on how it aligns with the Trust's objectives of seeking to deliver a high and rising income together with capital growth.
I'm Stephanie Sutton, Product Specialist for The Merchants Trust. All investments come with risk and when looking at potential investments in equities, it's important to think about risk. For Merchants, we seek to mitigate some of this risk by focusing on good companies with strong balance sheets, and the potential to pay attractive dividends, and also making sure we don't pay too much for them.
Biopharmaceutical giant, GSK has characteristics that we like in our portfolio companies. We believe that it has leading market positions and strong cash flow generation. These cash flows are not necessarily economically sensitive, people will always need drugs and medical innovation to lead longer, healthier lives.
Today, infectious diseases are still responsible for 1 in 7 deaths globally. GSK has a broad portfolio of medicines and vaccines for infectious diseases including HIV, it accounts for two-thirds of its research and development pipeline.
Vaccines are a great business to be in because they don't go off patent like other drugs, meaning that they can't get produced by others and sold as generic products at a cheaper price. It can also take many years to obtain vaccine approval, and incumbent leaders are very difficult to dislodge.
Of course, some of GSK's drugs are subject to patents. Patent expiries and liability risk may have made investors nervous. One of the company's very successful HIV drugs will go off patent in 2028 but the management team has been successful in adding new products to rebuild its portfolio of HIV drugs. We believe the market has overstated the risks and under appreciated the potential of the company that has been undergoing significant transformation following the spinoff of the consumer health business, Haleon, to focus on vaccines and pharmaceuticals.
GSK has been part of our portfolio for many years. The shares have performed reasonably well over the past year, but they remain modestly valued. We are not making any recommendation to buy GSK shares, but we believe it is well positioned for the future. It's a combination of value, quality and income that underpins The Merchant Trust's record of delivering dividend growth - something we have done every year for more than 40 years, as well as delivering long term total return for our shareholders.
Disclaimers: Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. Past performance does not predict future returns.
GSK Stock Story: Inside the MRCH Portfolio
Merchants aims to seek the best opportunities for dividend yield and long-term capital growth, to build a concentrated portfolio of leading UK companies. The focus is generally on a lower number of stocks in which the managers have high conviction.
The managers of The Merchants Trust look for shares with a healthy dividend yield, strong cash flows and good fundamentals. Critically, they also look to pay a reasonable price for the shares.
Investing in GSK: a Merchants Trust Investment Case Study
We believe that the biopharmaceutical company GSK exhibits many of the characteristics the Trust favours when selecting stocks. We believe it has leading market positions and benefits from strong cash-flow generation from areas that are not generally economically sensitive: as far as possible, people tend to look after their health and buy medicines or seek out innovative medical solutions regardless of the economic backdrop. GSK’s dividend history is also an attraction.
Infectious diseases account for around one in seven deaths worldwide, and GSK has a broad range of medicines and treatments for these types of illness. Indeed, these products account for around two-thirds of the company’s development pipeline.
The Strong Market Position of GSK
It can take many years to receive approval for vaccines and other drugs, so incumbents like GSK are very difficult to dislodge. Of course, some of GSK’s treatments remain subject to patent limitations. For example, one of its most successful patent drugs, which treats HIV, loses its patent in 2028. But the management has so far been successful in adding new products to its portfolio of HIV drugs.
Merchants’ management team believes the market may have overstated the risk of patent loss and underestimated the company’s potential. GSK has also undergone a significant transformation since spinning off its consumer healthcare division, known as Haleon, with the aim of focusing upon vaccines and pharmaceuticals .
The benefits of diversification
GSK has belonged to the Merchants’ investment portfolio for many years. However, it is important to note that this article is merely intended to highlight the types of companies Merchants invests in. It is not a recommendation to buy GSK. There are always risks when investing in an individual stock, including those associated with the market in general, as well as stock-specific developments that could adversely affect GSK’s stock price. So, it might be wise to spread risk by investing in a professionally managed portfolio – such as The Merchants Trust – that has exposure to a wide array of companies and is not overly exposed to movements in the GSK share price or that of other individual stocks.
Article disclaimers
Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.
The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement.