What Dividend Hunters Need To Know About GlaxoSmithKline plc

Royston Wild looks at whether GlaxoSmithKline plc (LON: GSK) is an attractive income stock.

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Today I am looking at whether GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is an appealing pick for those seeking chunky dividend income.

Progressive dividend policy to remain on track

GlaxoSmithKline has experienced significant earnings turbulence in recent years, as patent expiration across a host of its key products has put the top line under significant pressure. Indeed, the pharma giant has seen earnings basically flatline over the past two years as it has tried to get to grips with replacing these drugs with the next generation of revenues-drivers.

Despite these travails, the company has still managed to keep the full-year payout rolling higher during this period, and raised theGlaxoSmithKline dividend 2.6% higher alone last year to 78p per share. Even though earnings are expected to slip 2% in 2014, City analysts expect GlaxoSmithKline to lift the payout 3.6% to 80.8p. And a strong 9% earnings recovery next year is anticipated to result in an appetising 4.8% dividend hike to 84.7p.

These figures create solid yields of 5.2% and 5.4% for 2014 and 2015 correspondingly. Not only do such projections make mincemeat of the current FTSE 100 prospective average of 3.2%, but a respective readout of 2.6% for the entire pharmaceuticals and biotechnology sector is also taken to the cleaners.

Chunky cash pile supports payout growth

GlaxoSmithKline would not appear to be the most secure dividend selection, according to standard metrics. Indeed, dividend coverage for the next two years comes in well below the generally considered safety watermark of 2 times prospective earnings or above, with a reading of 1.4 times lasting through to end-2015.

However, GlaxoSmithKline’s impressive cash-generation qualities should enable it to continue rewarding investors with plump payouts. Adjusted free cash flow registered at £4.8bn last year, up from £4.7bn in 2012 which the business attributed to “lower tax payments and special UK pension contributions“.

Indeed, the company’s ability to throw up plenty of readies is also supporting its ongoing share repurchase scheme, the company having secured £1.5bn worth of shares in 2013. GlaxoSmithKline plans to buy back between £1bn and £2bn worth of shares in the current year alone.

On top of this, the company’s tie-up with Novartis announced in recent days — which will see GlaxoSmithKline swap its major oncology assets for Novartis’ vaccines division — will reward shareholders with a special capital return to the tune of $4bn.

Of course, GlaxoSmithKline’s solid balance sheet bodes well for future dividend growth, but the firm’s impressive cash pile also means that it can dedicate huge sums to developing the next strain of ‘superdrugs’ as well as dip into the M&A pool to supplement organic research.

The business of drug development is often a hit-and-miss business beset with delays and vast capital traps. But in my opinion GlaxoSmithKline has the both the know-how and the firepower to turbocharge its already-formidable product pipeline in future years, a promising omen for long-term earnings and dividend growth.

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.

Royston does not own shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.

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