77.3 Reasons That May Make GlaxoSmithKline plc A Buy

Royston Wild reveals why shares in GlaxoSmithKline plc (LON: GSK) look set to surge higher.

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Today I am explaining why I believe shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) are set to move higher owing to its improving outlook as a reliable and generous dividend generator.

The perfect tonic for healthy dividend growth

GlaxoSmithKline is one of the more lucrative dividend bets in the pharmaceuticals space, underpinned by strong financials and a promising earnings outlook. The company is expected to build its full-year dividend to 77.3p per share in 2013, and I expect payouts to continue rolling higher well into the long term.

The company’s latest financials released last week showed group revenues, at constant exchange rates, edge just 1% higher in July-September, to £6.51bn. Although pharmaceutical and vaccine sales in Europe rose 5%, and in the US and Japan by 2%, a 9% drop in its Emerging Markets and Asia Pacific division during the period resulted in a flat on-year performance.

Plummeting sales in China, which have fallen 61% since bribery allegations materialised earlier this year, was cited as a major factor behind the lack of sales growth. The company says that the crisis was caused by a handful of rogue operators, and that it is fully co-operating with authorities in the ongoing investigation, although it admits that “it is still too early for us to quantify the longer-term impact of the investigation on our performance in China.”

Still, I believe that, given the importance of GlaxoSmithKline as a major healthcare provider in the country, the current standoff with Beijing will prove nothing more than a temporary hiccup in the firm’s exciting growth story there. I fully expect the firm likely to emerge with nothing more than a slap on the wrist.

And looking at the firm’s wider operations, I reckon that a bubbly product pipeline in hot growth areas — which saw four approvals and three further US Food and Drug Administration filings during quarter three — is set to underpin exceptional earnings, and thus dividend, progression looking ahead.

GlaxoSmithKline’s expected 4.5% annual dividend per share growth for 2013, to 77.3p, results in a chunky dividend yield of 4.9%. This compares extremely well with a forward average of 2.4% for the entire pharmaceuticals and biotechnology sphere, as well as the corresponding readout of 3.1% for the FTSE 100.

And City analysts expect the pharma giant’s dividend to rise a further 6.5% next year, to 82.3p per share, a figure that currently translates to a 5.2% dividend yield.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.

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