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77.3 Reasons That May Make GlaxoSmithKline plc A Buy

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.

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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.

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

See all articles by Royston Wild