Is GlaxoSmithKline plc A Super Income Stock?

Does GlaxoSmithKline plc (LON: GSK) have the right credentials to be classed as a very attractive income play?

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 10 March, 2014 3:07 pm GMT

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.

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) continues to deliver impressive results and make encouraging progress with its drug pipeline. Indeed, the strong performance from the company has been reflected in a share price that has easily outperformed the FTSE 100 over the last year, with shares up 15% versus 7% for the wider index.

However, does this mean that GlaxoSmithKline’s attraction as an income play has diminished? Or is it still a super income stock?

Since it offers the 12^th best yield in the FTSE 100, GlaxoSmithKline is clearly still an attractive income play. With a yield of 4.6%, it easily beats the FTSE 100 yield of 3.5% and offers a significantly better return than is available in savings accounts while interest rates remain at historic lows.

However, GlaxoSmithKline’s real attraction as an income stock can best be seen in its dividend per share growth rate. Indeed, dividends per share have grown at an annualised rate of 6.3% over the last four years. Even when inflation was at its highest, GlaxoSmithKline’s dividend per share growth rate still beat it.

This bodes well for the future and, furthermore, GlaxoSmithKline is forecast to increase dividends per share by 5.1% per annum over the next two years. Although less than in the last few years, this rate of growth is still highly impressive and shows that the company is continuing to perform strongly.

In addition, with the company paying out 70% of profits as dividends in 2013, there appears to be some scope for this proportion to increase. In other words, while GlaxoSmithKline is investing heavily in its research and development capabilities and needs a certain amount of profit to be retained each year to do this, it could afford to pay out a slightly higher proportion of profit as dividends than it currently is doing. The effect of this would be to make GlaxoSmithKline an even more attractive income play.

Trading on a price to earnings (P/E) ratio of 15.1, GlaxoSmithKline cannot be described as ‘cheap’ — especially when the FTSE 100 is trading on a P/E of 13.5. However, its attractive yield, strong dividend growth rate and the potential to increase the proportion of profit paid as dividends mean that it remains a super income stock.