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.
