Big pharmaceuticals companies like GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) have been relied on for decades to provide steady dividend income, and with the company having provided a 4.8% yield last year, it’s not hard to see why.
In fact, if high yields are what you want, the recent price fall could set you up for a 5.8% yield this year, assuming the forecast 3.8% hike proves accurate.
Profit warning
The thing is, Glaxo’s half-time update in July contained a profit warning, suggesting that 2014 core EPS is only likely to be “broadly similar to 2013” — the firm had previously been expecting to see a rise.
The disappointment is partly due to a 9% rise in the value of the pound against the dollar over the past 12 months, and that’s always going to hit a company reporting in sterling. But it was enough to send the price down 10% to today’s 1,393p.
What about the long-term future of Glaxo’s dividends? Here’s a look at the company’s recent record:
| Year | Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2010 | 65p | 5.2% | 0.83x | +6.6% |
| 2011 | 70p | 4.8% | 1.63x | +7.7% |
| 2012 | 74p | 5.5% | 1.51x | +5.7% |
| 2013 | 78p | 4.8% | 1.44x | +5.4% |
| 2014* |
81p | 5.8% | 1.17x | +3.8% |
| 2015* |
85p | 6.1% | 1.19x | +4.9% |
* Forecast
Nice yields
The yields themselves look good, but current yield is not the only thing a long-term dividend investor should be looking for. If you’re building a portfolio aimed at providing steady income in a decade or two’s time, you need to watch out for the effective return you’re going to get that far in the future.
So an annual cash amount that is rising above inflation is what we really want to see, and on that score GlaxoSmithKline is looking pretty good. Forecast rises might not be massively above inflation for this year and next, and there is now a fear that this year’s rise might be cut back a bit in line with those lower-than-expected earnings.
But Glaxo has the financial muscle to even out short-term ups and downs in its longer-term approach to dividends — as we saw in 2010 when that year’s earnings didn’t quite cover the cash. And the firm did boost its second-quarter dividend installment by 6% to 19p per share on top of the same a quarter previously, giving us a bit of confidence in its priorities.
Maximizing returns
Glaxo also stressed its “commitment is to use free cash flow to support increasing dividends, undertake share repurchases or, where returns are more attractive, reinvest in the business, including bolt-on acquisitions“, and that seems like a pretty firm strategy of maximizing shareholder returns over the long term.
GlaxoSmithKline, then, still looks like a very good candidate for a retirement income portfolio to me.
