The FTSE 100’s Hottest Dividend Picks: GlaxoSmithKline plc

Royston Wild explains why GlaxoSmithKline plc (LON: GSK) is a brilliant dividend bet.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

GlaxoSmithKlineToday I am detailing why GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is a terrific income selection.

A formidable payout history

GlaxoSmithKline is one of the best pharmaceutical stocks around for those seeking excellent dividend prospects, in my opinion. Indeed, the business has fostered an enviable reputation as a reliable provider year-on-year dividend growth, having lifted the payout at a compound annual growth rate of 6.3% over the past five years alone.

Although earnings have fluctuated during this period — the pharma giant has seen earnings dip in two of the past five years due the crippling effect of patent expirations across key labels — GlaxoSmithKline’s formidable cash pile has enabled it to keep payouts rolling at a decent clip.

And analysts expect the company to maintain its progressive dividend programme over the next couple of years at least. The firm is predicted to lift the payout 5% this year to 81.7p per share, with a further 3% increase — to 84.2p — pencilled in for next year.

These projections create enormous yields of 5.2% and 5.4% respectively, flying above a forward reading of 3.2% for the FTSE 100 and making mincemeat of a corresponding readout of 2.5% for the complete pharmaceuticals and biotechnology space.

New markets, drugs to keep dividends rolling

Still, investors should take note of the ongoing effect of exclusivity losses on GlaxoSmithKline’s earnings profile. The firm is predicted to punch a 9% dip for 2014, although a 9% bounceback is predicted next year as the next generation of revenues-driving drugs hit the market.

Projections for this year and next create miserly dividend coverage of just 1.2 times and 1.3 times predicted earnings for 2014 and 2015 correspondingly, well below the security watermark of 2 times or above.

As well, the company has also seen free cash flow dive in recent times, with lower profits and the impact of a strong pound driving the figure to £507m from £1.71bn during January-June from the same 2013 period. The Brentford-based firm saw revenues and profits slip 4% and 14% correspondingly as the entry of generic products battered demand for its own labels, while the ongoing corruption investigaton in China drove sales 25% lower year-on-year.

The effect of declining cash flows prompted the company to warn that share repurchases are likely to be ‘immaterial’ in 2014. Still, GlaxoSmithKline’s decision to raise the interim payment 6% to 19p per share underlines its commitment to keep dividends moving solidly higher. And in my opinion the company’s plan to divest £1bn worth of assets this year should bolster investor confidence in further bumper payouts.

And over the long-term, I believe that the firm’s budding pipeline of new drugs — the company currently has 40 products in late-stage testing — as well as galloping sales in emerging markets should maintain the firm’s reputation as a go-to dividend pick as earnings get back on track, especially once the current Chinese corruption saga eventually blows over.

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 Wild has no position in any shares mentioned. The Motley Fool recommends GlaxoSmithKline.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »