Is GlaxoSmithKline plc A Super Income Stock?


GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) continues to deliver impressive results and make encouraging progress with its drug pipeline. Indeed, the strong performance from the company has been reflected in a share price that has easily outperformed the FTSE 100 over the last year, with shares up 15% versus 7% for the wider index.

However, does this mean that GlaxoSmithKline’s attraction as an income play has diminished? Or is it still a super income stock?

Since it offers the 12th best yield in the FTSE 100, GlaxoSmithKline is clearly still an attractive income play. With a yield of 4.6%, it easily beats the FTSE 100 yield of 3.5% and offers a significantly better return than is available in savings accounts while interest rates remain at historic lows.

However, GlaxoSmithKline’s real attraction as an income stock can best be seen in its dividend per share growth rate. Indeed, dividends per share have grown at an annualised rate of 6.3% over the last four years. Even when inflation was at its highest, GlaxoSmithKline’s dividend per share growth rate still beat it.

This bodes well for the future and, furthermore, GlaxoSmithKline is forecast to increase dividends per share by 5.1% per annum over the next two years. Although less than in the last few years, this rate of growth is still highly impressive and shows that the company is continuing to perform strongly.

In addition, with the company paying out 70% of profits as dividends in 2013, there appears to be some scope for this proportion to increase. In other words, while GlaxoSmithKline is investing heavily in its research and development capabilities and needs a certain amount of profit to be retained each year to do this, it could afford to pay out a slightly higher proportion of profit as dividends than it currently is doing. The effect of this would be to make GlaxoSmithKline an even more attractive income play.

Trading on a price to earnings (P/E) ratio of 15.1, GlaxoSmithKline cannot be described as ‘cheap’ — especially when the FTSE 100 is trading on a P/E of 13.5. However, its attractive yield, strong dividend growth rate and the potential to increase the proportion of profit paid as dividends mean that it remains a super income stock.

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Peter owns shares of GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.