2 FTSE 100 dividend stocks I’d avoid despite yielding more than 5%

These two FTSE 100 (INDEXFTSE: UKX) dividend growth stocks face uphill tasks, says Harvey Jones.

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The FTSE 100 dividend yield average is a thumping 4.5%, giving savers sweet relief from terminally low savings rates.

Some of the biggest dividend stocks offer even larger yields than that, which can really turbocharge your income. Here are two 5% yielders that caught my eye. I thought they might fit nicely in your Stocks and Shares ISA but on closer inspection, I’d approach with caution.

GlaxoSmithKline

Pharmaceuticals giant GlaxoSmithKline (LSE: GSK) is one of the most renowned FTSE 100 income stocks and that remains the case today. Its current forecast yield is 5.1%, with cover of 1.4. However, the Glaxo share price has underperformed horribly, and trades 3% lower than five years ago, whereas the index as a whole is up 12% over the same period.

Worse, the dividend has been frozen at 80p since 2015, and is expected to stay there for at least the next couple of years. Free cash flow fell by 50% to £165m in the three months to 31 March. Net debt of £22bn is another worry, although plans to spin off its consumer healthcare business in a £10bn joint venture with US rival Pfizer should reduce that.  

Glaxo has been hit by some blockbuster drugs going off patent, notably Advair, which has made up almost a quarter of revenues. Investing in R&D to strengthen its drugs pipeline has taken priority over rewarding shareholders, as management looks to get those revenues flowing again.

Pipeline panic

Glaxo has had some success on that front, recently reporting positive data for several potential new medicines in HIV and oncology, but it needs a lot more of this to fully convince.

CEO Emma Walmsley is pushing on with her turnaround plans and the company’s stock is yours for a relatively bargain price of just 14.3 times forecast earnings. This is low for Glaxo and Roland Head recently suggested that this might make a good entry point.

However, you are relying on Glaxo replenishing its pipelines and there are no guarantees on that score. The stock is riskier than I feel it should be.

Sainsbury’s

Investors in supermarket giant J Sainsbury (LSE: SBRY) have endured a dismal 12 months, its stock crashing 40% in that time. The grocery sector as a whole has struggled due to Brexit, squeezed incomes, Aldi and Lidl, but the Sainsbury’s share price has had by far the worst of it. Morrisons has fallen ‘only’ 18%, and Tesco just 5%.

Sainsbury’s was hit hard by the collapse of the Asda merger, which has offset the good news from its apparently successful takeover of Argos. This is forcing the group to focus on its core retail offering, and management is now looking to cut labour costs, boost buying terms and revamp its own label range to revive profits. 

Taking stock

I reckon Sainsbury’s has its work cut out as Brexit squeezes incomes and the German discounters continue to make strides. Debt is another concern. On the plus side, the 5.5% yield is tempting and looks solid with cover of 2.0.

Sainsbury’s stock also looks cheap trading at 11.2 times earnings. Earnings may pick up slightly going forward, and the share price might spike as investors finally decide it has been oversold. I can’t work up much enthusiasm for it though.

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 of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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