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This Week’s Top Blue-Chip Income Buy: GlaxoSmithKline plc

I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term. Right now, I reckon GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is looking a great buy for income.

Chinese burn

GlaxoSmithKline (GSK) gave us guidance for the year ahead when releasing its 2012 results. That guidance — core earnings-per-share (EPS) growth of 3-4% on sales growth of around 1% — has been reiterated throughout the year, most recently within a third-quarter statement released last week.

However, the shares are currently 5% below the level of three months ago, and 10% down on their year-high made in May. News during the summer that the Chinese authorities had launched an investigation into bribes and kickbacks by GSK hasn’t helped sentiment.

Nevertheless, I noted with interest that there was no big reaction from the market to GSK’s Q3 announcement last week, which included news that sales in China were down 61% and that “it is still too early for us to quantify the longer-term impact of the investigation on our performance in China”.

I reckon the market thinks it’s already punished GSK enough. More than enough, I would say. For one thing, China accounted for less than 3% of GSK’s total revenue last year; and, for another, GSK’s big pharma rivals are also feeling the heat from the Chinese authorities.

A great opportunity right now

When GSK’s shares were at their high in May, the trailing dividend yield was 4.2%. At the time of writing the shares are trading at 1,605p, and the yield has risen to 4.8%. Prior to the recent share weakness you have to go back to early April to find the market offering GSK on as high a trailing yield.

But what yield can investors buying shares today expect for their first year? The table below shows the recent pattern of dividends paid, and forecasts through 2014.

  2012 dividends 2013 dividends (forecast Q4) 2014 forecast dividends
Q1 17p 18p 19p
Q2 17p 18p 19p
Q3 18p 19p 20p
Q4 22p 23p 24p
Total 74p 78p 82p

Investors today will pick up the Q3 19p dividend announced last week (the ex-dividend date is 13 November), with forecasts suggesting a 23p Q4 payout, followed by 19p dividends for the first two quarters of 2014. That tots up to 80p, and gives a super-healthy income of 5%. Hence, I rate GSK a great buy for income investors right now.

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> G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.