After a year of disappointing returns for UK markets overall, the sole comfort for many investors will be that the FTSE 100 average dividend yield was nearly 4%. The effect of strong dividends compounded over many years is a sight to behold. So, are dividend-chasing investors wise to look at GlaxoSmithKline Plc (LSE:GSK), AstraZeneca Plc (LSE:AZN) and Unilever Plc (LSE:ULVR) as smart investments for 2016 and well beyond?
Going its own way
2015 has been a year of frenetic mergers and eye-watering acquisitions in the healthcare industry. GSK has been the rare big pharma member that hasn’t dived head first into this game during 2015. Management has purposefully charted the company on a different route than competitors, easing back from chasing blockbuster drugs in order to focus on more high-volume, low-cost products such as vaccines marketed towards the emerging middle classes of the developing world.
The theory is that as developing world governments increasingly talk about reining-in high healthcare expenditures, it makes little sense to invest billions in a drug that may only treat a few thousand people a year. While this thesis has yet to play out, it may make GSK an appealing option for investors seeking both a safe 6% dividend and stable play as it won’t be reliant on shelling out billions for possible blockbuster drugs each time its pipeline looks relatively shallow.
Volatility to continue
Meanwhile, AstraZeneca has doubled-down on the traditional approach by spending, or planning to spend, billions in just the past quarter purchasing respiratory treatments and a developmental leukaemia drug, among others. AstraZeneca has been forced into this as it sees the ending of highly-profitable US patents on Nexium and Crestor this year and next, which together accounted for nearly 35% of 2014 revenue.
Increased outlays on acquisitions have been one of the major reasons why AstraZeneca’s earnings have not covered dividend payments for the past two years. With share prices nearly £12 shy of Pfizer’s £55 per share offer in 2014 and revenues set to decrease with the loss of blockbuster drugs’ patents, I would be wary of buying into AstraZeneca now when there are more stable options available.
High price, high value
Just as people will always spend money on pharmaceuticals, they’ll also need soap, deodorant and chocolates. For that reason consumer goods giant Unilever is always a popular defensive play for investors seeking a safe dividend come bull and bear markets alike.
While revenue has grown 9% over the past five years, management has increased operating margins from 13.6% to 14.5% over the same period to account for a whopping 23.5% rise in net income since 2010. The company is also well diversified, with 57% of revenues coming from developing countries, markets that will be buying more of Unilever’s goods as the middle classes grow further in the years to come.
Management’s focus on a profitable and lean organisation, a 3% dividend yield well covered by earnings, and good growth prospects mean that Unilever is not a cheap stock. It currently trades at 23 times earnings. But quality has never come cheap in the market and I believe investors looking for a safe dividend and solid growth would do well to consider Unilever even at this price.
