How Safe Is GlaxoSmithKline plc’s 6% Dividend Yield?

How safe is GlaxoSmithKline plc’s (LON: GSK) dividend?

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.

GlaxoSmithKline (LSE: GSK) currently supports one of the largest dividend yields in the FTSE 100.

At present, the company’s shares yield just under 6%, around double the market average, making them extremely attractive in the current interest rate environment. 

However, it is often the case that a higher-than-average dividend yield like Glaxo’s reflects the market’s belief that the company is sick and will have trouble maintaining its dividend payout. 

That said, Glaxo’s management has stated that the group’s dividend payout will remain at 80p per share for the next three years. This indicates that the company will yield 5.9% for the next three years based on the current price. 

But how realistic is management’s outlook? It’s not uncommon for companies to guarantee their dividend payouts, only to backtrack and slash the payout a few months later.

So, will Glaxo’s management stay true to their word?

Crunching numbers

According to my figures, it looks as if Glaxo will be able to maintain a payout of 80p per share for the next few years. 

Last year the company generated £5.2bn in cash from operations. Meanwhile, the group’s capital spending totalled £1.7bn, giving a free cash flow of £3.5bn. During the past five years, on average Glaxo has reported a free cash flow of approximately £4.4bn. 

Free cash flow gives a much clearer view of a company’s ability to maintain its dividend payout. Indeed, without cash, it’s tough to invest without borrowing, pay dividends and reduce debt. Earnings can often be clouded by accounting gimmicks, but it’s tougher to fake cash flow. 

Funding the payout

With around 4.9bn shares in issue, a dividend of 80p per share per annum will cost Glaxo around £3.9bn per annum to maintain. According to last year’s figures, Glaxo’s dividend payout of 80p per share cost the company a total of £3.8bn. 

Unfortunately, this figure of £3.8bn is only just covered by Glaxo’s free cash flow based on the five-year average. With this being the case, Glaxo doesn’t have much room for manoeuvre and if things don’t go to plan the company could struggle to make ends meet. 

Still, these figures are based on historic numbers and don’t take into account the initiatives Glaxo has in place to improve profit margins. 

Specifically, the group is on track to achieve annualised cost savings of £3bn by the end of 2017. Also, Glaxo is set to receive £3bn from its recent asset swap deal with Novartis. As part of this deal, a further £1bn will be returned to investors via a special dividend. 

Moreover, Glaxo’s management believes that the company’s earnings will expand at a compound annual rate in the mid-to-high single digits from 2016 onwards, further boosting group cash flow. 

Looks safe

All in all, Glaxo’s lofty dividend yield seems to be safe for the time being. The dividend is covered by free cash flow at present and cost-saving initiatives, coupled with earnings growth should only help improve dividend cover.

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.

Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

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 »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »