Can GlaxoSmithKline plc & Royal Dutch Shell Plc’s Sky-High Yields Survive 2016?

2015 has been a tough year for income giants GlaxoSmithKline plc (LON: GSK) and Royal Dutch Shell Plc (LON: RDSB). Harvey Jones asks: can the yield survive?

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The FTSE 100 is packed with mind-boggling yields right now, although it boggles the mind how long many can last. Be warned, the higher they go, the riskier they become.

Glaxo Didn’t Go

This time last year I tipped pharmaceutical giant GlaxoSmithKline (LSE: GSK) as one of my favourites for 2015, but how wrong I was. It is down nearly 10% over the last 12 months. Clearly, I failed to understand just how deep-rooted its problems are. It remains too dependent on its respiratory treatment, Advair, a former money-spinner that is now facing pricing pressures in the US and Europe, while its pipeline of 40 new drugs and vaccines in Phase II/III clinical development isn’t ready to pick up the slack as yet. Earnings per share (EPS) fell 13% in Q3, although this largely reflects dilution from the Novartis transaction.

Promises, Promises

All is not lost. Glaxo’s gGroup Q3 sales rose 11%, with its pharmaceuticals, vaccines and consumer healthcare divisions all holding their own. This should help underpin management’s commitment to paying an annual ordinary dividend of 80p for the three years running to 2017. Today’s 6.1% yield of 6.1% is covered just 1.2 times, so Glaxo will need the cash to keep flowing to meet its commitment.

EPS should recover next year, with a forecast rise of 11% to 84.33p. Revenues may stagnate but pre-tax profits are forecast to rise from around £5.1bn this year to £5.74 next year, which suggests that management should be able to maintain its payout, especially given the embarrassment of failing to meet its recent firm promise.

Not So Sure Of Shell

I may have bigged up Glaxo last year but at least I had the sense to dump my holdings in Royal Dutch Shell (LSE: RDSB), which is down a whopping 28% over the past 12 months. Naturally, the plummeting oil price is mostly to blame, and with Saudi Arabia dashing hopes that it would cut production at the recent Opec meeting, it could fall further still.

This is really turning up the heat on Shell, which currently yields 7.1%. Cover for the payout is forecast to fall to just one times, putting it under real pressure. Shell has never cut dividends since the war, but we live in turbulent times, and that proud record could fall next year.

Troubled Waters

Nerves will be frazzled, especially with Shell slumping to a third quarter loss of $6.1bn, well short of forecasts, due to write-offs and lower oil and gas prices. Both net investments and dividend payments were covered from cash flow, however, and is management is keen to point out, the merger with BG Group should boost cash flows.

The yield is supported for now and cost cutting should help Shell buy time. Most of its recent losses were down to writing off projects that weren’t actually producing any oil. It can withstand oil prices for a while, but unless the price picks up in the second half of next year, it may run into trouble: $11.6bn a year is a lot of money.

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.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Up another 6% in the last week! Is the BP share price ready to go gangbusters?

The BP share price has been on fire lately. Harvey Jones looks at what's driving the FTSE 100 stock's recovery,…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

High-flying IAG shares are up 50% in 3 months but I still think they’re too cheap to ignore!

Timing the market is almost impossible but Harvey Jones managed it when buying IAG shares in April. Can the FTSE…

Read more »

ISA coins
Investing Articles

Want to earn £1k+ in annual passive income from a £20k Stocks and Shares ISA? Consider this!

Our writer sets out some points to consider when trying to target a four-figure income from one year's Stocks and…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

3 risks to the Rolls-Royce share price, after its 979% climb

After a 979% growth in the Rolls-Royce share price, our writer still sees things to like in the business. But…

Read more »

Buffett at the BRK AGM
Investing Articles

Can Warren Buffett principles help when looking for AI stocks to buy?

Billionaire Warren Buffett has made a fortune by applying old investing principles to new industries. Can our writer learn some…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

Up 36% in 3 months! Is my nightmare purchase of Glencore shares about to come good with a vengeance?

When Harvey Jones bought Glencore shares two years ago, he didn't expect to find himself sitting on a 45% loss.…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£1,000 invested in Lloyds shares 5 years ago is now worth…

Anyone who’s owned Lloyds shares over the last five years is probably laughing right now with impressive returns that crushed…

Read more »

A mature woman help a senior woman out of a car as she takes her to the shops.
Investing Articles

If a 50-year-old puts £500 a month into a SIPP, here’s what they could have by retirement

Investing £500 a month with a SIPP could build a pension pot worth £269,900 or quite a bit more over…

Read more »