The FTSE 100’s Hottest Dividend Picks: GlaxoSmithKline plc

GlaxoSmithKlineToday I am detailing why GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is a terrific income selection.

A formidable payout history

GlaxoSmithKline is one of the best pharmaceutical stocks around for those seeking excellent dividend prospects, in my opinion. Indeed, the business has fostered an enviable reputation as a reliable provider year-on-year dividend growth, having lifted the payout at a compound annual growth rate of 6.3% over the past five years alone.

Although earnings have fluctuated during this period — the pharma giant has seen earnings dip in two of the past five years due the crippling effect of patent expirations across key labels — GlaxoSmithKline’s formidable cash pile has enabled it to keep payouts rolling at a decent clip.

And analysts expect the company to maintain its progressive dividend programme over the next couple of years at least. The firm is predicted to lift the payout 5% this year to 81.7p per share, with a further 3% increase — to 84.2p — pencilled in for next year.

These projections create enormous yields of 5.2% and 5.4% respectively, flying above a forward reading of 3.2% for the FTSE 100 and making mincemeat of a corresponding readout of 2.5% for the complete pharmaceuticals and biotechnology space.

New markets, drugs to keep dividends rolling

Still, investors should take note of the ongoing effect of exclusivity losses on GlaxoSmithKline’s earnings profile. The firm is predicted to punch a 9% dip for 2014, although a 9% bounceback is predicted next year as the next generation of revenues-driving drugs hit the market.

Projections for this year and next create miserly dividend coverage of just 1.2 times and 1.3 times predicted earnings for 2014 and 2015 correspondingly, well below the security watermark of 2 times or above.

As well, the company has also seen free cash flow dive in recent times, with lower profits and the impact of a strong pound driving the figure to £507m from £1.71bn during January-June from the same 2013 period. The Brentford-based firm saw revenues and profits slip 4% and 14% correspondingly as the entry of generic products battered demand for its own labels, while the ongoing corruption investigaton in China drove sales 25% lower year-on-year.

The effect of declining cash flows prompted the company to warn that share repurchases are likely to be ‘immaterial’ in 2014. Still, GlaxoSmithKline’s decision to raise the interim payment 6% to 19p per share underlines its commitment to keep dividends moving solidly higher. And in my opinion the company’s plan to divest £1bn worth of assets this year should bolster investor confidence in further bumper payouts.

And over the long-term, I believe that the firm’s budding pipeline of new drugs — the company currently has 40 products in late-stage testing — as well as galloping sales in emerging markets should maintain the firm’s reputation as a go-to dividend pick as earnings get back on track, especially once the current Chinese corruption saga eventually blows over.

The right prescription for bumper dividend flows

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Royston Wild has no position in any shares mentioned. The Motley Fool recommends GlaxoSmithKline.