How safe is GlaxoSmithKline plc’s dividend?

Are dividends built to endure at GlaxoSmithKline plc (LON: GSK), or is trouble ahead?

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.

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) is one of the largest firms listed in the FTSE 100 by market capitalisation and as such, is bound to attract the attention of dividend-seeking investors.

One market aphorism has it that income strategies tend to beat growth strategies. So it could pay to seek out at least some reliable dividend generators when building a portfolio of shares.

At first glance, GlaxoSmithKline seems attractive. Today’s share price around 1,644p throws up a forward dividend yield of almost 4.9% for 2017.

A defensive sector with issues

Big firms such as GlaxoSmithKline in the pharmaceuticals sector tend to have business models similar to consumer goods businesses in other sectors. Whenever a company comes up with a product that customers buy, use up, and buy again repeatedly, cash generation can be reliable and predictable for the business. In the case of GlaxoSmithKline, customers rarely forego their medicines so, in theory, the firm enjoys the defensive, cash-generating qualities that we should be looking for in a dividend investment.

By now, you will probably already be familiar with the so-called patent cliff faced by big pharmaceuticals firms over recent years. Several of GlaxoSmithKline’s big-selling and profitable lines all came to the end of their patent protection periods at around the same time, opening the way for generic competition to swoop into the market with cut-price offerings. The effect on GlaxoSmithKline’s profits was significant. Earnings per share fell for the last four years, first by 2% then by 3%, 12% and a massive 21%.

The company fought the patent-expiry issue by bearing down on costs and working hard to develop new potential blockbuster drugs from its research and development pipeline. The measures are taking effect, and City analysts predict a return to earnings growth during 2016, with EPS up around 27%. That’s encouraging. 

Keeping the faith

Consumer goods firms in other sectors, such as Unilever, don’t rely on patent protection so much as on the strength of their brands to attract customers. So even though profits might be lower than previously enjoyed, I think it’s reasonable to assume that GlaxoSmithKline can still be a reliable cash generator and a solvent business even when challenged by competition. I wonder if such thinking is what kept well-known fund manager Neil Woodford invested in GlaxoSmithKline when the shares were down near 1,000p during 2009?

I looked at the shares myself back then but didn’t have Neil Woodford’s insight. I wish I had because a 64% capital gain plus generous dividend income over the last seven years isn’t to be sniffed at. All that was achieved during a period of crisis and falling earnings, remember, so what might happen when things are going well for the business? Such can be the power of good dividend-paying defensives.   

The dividend payout rose a little each year until 2015 when the directors held it at 2014’s level of 80p per share. By then, adjusted earnings per share dipped slightly below the level of the dividend, so it was prudent not to raise the payout further. In recent guidance, the firm told us it intends to maintain the dividend at 80p per share for 2016 and 2017 too. As cash flow and earnings rebuild — and the outlook is positive — I think right now could be a good time to add GlaxoSmithKline to a portfolio for income.

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.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. 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

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »