Today I am looking at pharmaceutical giant GlaxoSmithKline‘s (LSE: GSK) (NYSE: GSK.US) dividend outlook past 2014.
The prescription for delicious dividend growth
A loss of product exclusivity for major players across the pharma sector has caused many to question whether firms such as GlaxoSmithKline can afford to keep their über-generous dividend policies rolling, particularly as earnings fluctuate wildly and vast capital expenditure is required to develop the next generation of revenue-drivers.
Indeed, the effect of frequent patent expirations has weighed on GlaxoSmithKline’s earnings performance in recent years, and City brokers expect the business to follow up 2012’s 1% earnings dip with a flat performance in 2013. Still, earnings are expected to rise 6% and 9% in 2014 and 2015 respectively as the firm’s product pipeline ratchets up.
The pharmaceutical play has a great recent record of raising the dividend even in times of heavy earnings weakness, and boasts an inflation-bursting compound annual growth rate of 6.7% dating back to 2008. And City analysts expect a solid earnings bounceback this year and next to underpin a 5.8% improvement in the 2014 full-year payout to 82.3p per share — up from a forecast 77.8p for 2013 — and an additional 6.2% rise to 87.4p next year.
If realised, these prospective payments forge bumper dividend yields of 5% for 2014 and 5.3% for 2015. Such figures blast a forward average of 2.3% for the entire pharmaceuticals and biotechnology sector, as well as corresponding reading of 3.1% for the FTSE 100, clean out of the water.
At face value, dividend cover of 1.6 times and 1.5 times for 2014 and 2015 respectively, below the widely-regarded security benchmark of 2 times, should raise alarm bells over the company’s ability to shell out these dividends should earnings fall. But as I have already mentioned, GlaxoSmithKline has reliably increased the dividend even as earnings, and thus dividend cover, have capitulated, which should give investors peace of mind over future payments.
Besides, I believe that GlaxoSmithKline’s exceptional drugs pipeline should undergird solid earnings growth, and with it maintain blistering dividend growth. Indeed, the company announced this week that it received European approval for its Tivecay HIV treatment, a potentially-significant sales driver, and has a string of other products awaiting approval.
In addition, I reckon that GlaxoSmithKline is likely to embark on more M&A activity to restart earnings expansion and bolster shareholder returns — just last month the company raised its stake in India’s Glaxo Pharmaceuticals Limited to 75% in order to increase its emerging market exposure. I believe that the pharma play is a great pick for both growth and income investors.
