In this article I am looking at why GlaxoSmithKline’s (LSE: GSK) (NYSE: GSK.US) resurgent development pipeline bodes well for income growth.
A delightful dividend outlook
Even though GlaxoSmithKline has experienced volatile earnings performance in recent years, the company’s formidable cash pile has enabled it to keep its progressive dividend policy on track. The drugs giant has raised payouts at a compound annual growth rate of 6.3% since 2009, and City brokers expect the company to lift the full-year dividend again in 2014, to a whopping 81.7p per share.
If realised, such a payout would represent an inflation-beating 4.7% improvement from 2013’s dividend. And this projection creates a mammoth 5.1% yield, far in excess of a prospective average of 2.5% for the complete pharmaceuticals and biotechnology sector. And the yield edges to 5.2% next year, when GlaxoSmithKline is anticipated to hike the total payout 3.6% to 84.6p.
On top of this, GlaxoSmithKline plans to execute between £1bn and £2bn worth of share repurchases in the current year, making it an attractive pick for income investors.
GlaxoSmithKline continues to suffer from patent losses across its key drugs, and announced in April that, at constant exchange rates, total sales declined 2% to £5.6bn during January-March. The company’s Lovaza triglycerides-battling brand is the latest product to lose exclusivity, but GlaxoSmithKline is chucking vast sums of capital to boost its drugs pipeline and offset eroding barriers to entry.
The drugs testing process is of course a bumpy process, and GlaxoSmithKline received a setback this month when Phase III evaluations of its potentially-blockbusting darapladib product — used to treat those suffering from acute coronary conditions — failed at the second time of asking.
But broadly speaking the company has been hugely successful in getting its products to market. In May the company received authorisation from the European Commission for its Anoro medication, used to treat the symptoms of chronic obstructive pulmonary disease (COPD) and paving the way for roll-out by the close of September. And in North America its COPD-soothing Incruse Ellipta treatment was also given the green light for launch by the US Food and Drug Administration.
GlaxoSmithKline currently has around 40 more products in late stage development, a promising omen for future revenues growth. With its bubbly drug pipeline ready to deliver the next generation of revenues-driving products, and with it the prospect of strapping earnings growth, I believe that the pharma play is an excellent choice for those seeking lucrative income flows.
