Based on current dividend forecasts, pharmaceuticals giant GSK (LSE:GSK) could be a good choice for passive income investors.
At £14.37 per share, the GSK share price carries a 3.9% dividend yield for 2023. This is higher than the 3.6% average for FTSE 100 shares.
And things get even better for next year. For then, the healthcare giant’s dividend yield marches to 4.2%.
So should investors buy GSK shares to make a healthy second income? Or would buying other UK dividend shares be a better idea?
Dividend growth
To recap, dividends at the drugs developer fell in 2022 to 57.75p per share, from 80p in previous years. This reflected the company’s desire to boost investment in R&D and give it more firepower for acquisitions.
But City brokers expect dividends to start rising straight away. GSK has said it plans to raise the annual dividend to 56.5p per share in 2023, a target that brokers think is likely. Furthermore, analysts expect the full-year payout will increase again to 59.9p next year.
This results in those market-beating yields. And what’s more, current profits forecasts suggest the pharma giant will be in good shape to meet those payout targets.
Predicted dividends for the period are covered 2.6 times. Dividend coverage above 2 times provides a wide margin of safety to investors.
On the right track
Impressive first-quarter numbers suggest GSK could be good shape to grow earnings and dividends. Excluding the sale of Covid-19 products, turnover rose by 10% in the first quarter, thanks to strong demand for its shingles and HIV treatments.
The huge sums GSK’s ploughing into R&D mean the firm is set it up well to find the next blockbuster treatment and grow earnings strongly. As of March, it had a healthy 68 vaccine and speciality medicines in its development pipeline.
There’s no guarantee that these treatments will see the light of day, of course. Medicine development can be highly unpredictable and disappointments at the testing and regulatory stages are common. But the FTSE company’s packed pipeline gives it a terrific chance to find the next profits driver.
These include Daprodustat, a hypoxia-inducible factor prolyl hydroxylase inhibitor (HIF-PHI) that’s used to treat anaemia in chronic kidney disease patients. Sales of these drugs are expected to grow into the billions over the next several years. And GSK will have the only HIF-PHI on the market in the US when it likely launches later this year.
On top of this, GSK now has the financial clout to search out the next major sales booster through steady acquisition activity. This month, it snapped up Bellus Health, a company whose chronic cough treatment Camlipixant has been described by GSK as potentially best-in-class.
The verdict
Buying healthcare shares could be a lucrative way to make long-term returns. A growing global population, allied with soaring healthcare spending in emerging markets, bodes well for drugs developers.
As a fan of value stocks, I think GSK shares are especially attractive right now. On top of those large dividend yields, its shares trade on a forward price-to-earnings (P/E) ratio of just 9.8 times.
With its drug development programmes making strong progress I think now could be a great time to invest.
