Why GlaxoSmithKline plc Really Yields 7%

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is a FTSE 100 dividend champion. Indeed, the company is a portfolio essential of acclaimed dividend investor, Neil Woodford and at present Glaxo’s shares support a dividend yield of just under 5%.

However, if we factor in both share repurchases and dividends, Glaxo’s effective yield jumps up to 7% and there is plenty more to come.

Throwing out cashgsk

Glaxo is throwing cash at investors. The company returned a total of £4.7bn to shareholders during 2013. This distribution was split, £1bn by way of stock repurchases and £3.7bn through dividend payouts. All in all, this worked out at around 96p per share. 

That said, 2013 was a year of low returns for Glaxo’s shareholders. The year before the company returned a total of £5.8bn to investors, and during 2011 before that the company returned £5.4bn. 

What’s more, on a per share basis, these returns are even more impressive. For example, at the beginning of 2011 and 2012, Glaxo had around 5.1bn shares in issue. So, the company returned £1.14 per share to investors during 2012 and £1.06 per share during 2011. 

If you’d brought Glaxo’s shares at the beginning of each year, these cash returns were equal to a dividend yield of 8.1% for 2011, 7.9% for 2012 and 7% during 2013.

And it would appear that these returns are set to continue. Glaxo’s management continues to increase that dividend by 6% per annum and after the recent deal with Novartis, investors are set for a one-off payout.  

More to come

Glaxo’s recent deal with Novartis is a game changer for both the company and shareholders. The deal saw Glaxo dispose of its oncology portfolio for $16bn, while acquiring Novartis’ global Vaccines business for $5.3bn.

Additionally, Glaxo and Novartis will create a new Consumer Healthcare business with 2013 pro forma revenues of £6.5 billion. Glaxo will have majority control of this world leading Consumer Healthcare business with an equity interest of 63.5%. 

According to management, the deal will be accretive to earnings almost immediately and Glaxo is set to receive net proceeds of £4bn from the deal.

The company has stated that it will return this cash to investors via a B share scheme. With around 5bn shares in issue, this cash return will be worth approximately 80p per share, a one-off yield of 5.1%.

Foolish Summary

So overall, after including share buybacks, Glaxo’s shares currently yield excess of 7%. The company is also planning to make a one-off payment to shareholders later this year, which will be equivalent to a one time dividend yield of 5.1%. 

With this in mind, Glaxo’s defensive nature, robust cash flows and impressive dividend yield makes the company the perfect long term buy and forget share.

Every portfolio needs a selection of shares with defensive qualities like those of Glaxo. A selection of defensive shares with attractive dividend yields gives your portfolio a solid backbone, allowing you to sleep soundly at night.  

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Rupert owns shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.