GlaxoSmithKline plc Is The Ideal Dividend Investment

GlaxoSmithKlineI’ve never quite been able to make up my mind about GlaxoSmithKline (LSE: GSK).

It’s one of the world’s leading pharmaceutical companies, with perhaps the strongest drugs pipeline in pharma. And GSK is also an incredibly innovative company, which really seems to have cracked research.

Dogged by controversy

But this is also a company which controversy seems to follow around. The latest scandal, about bribery (and sex tapes) in China, has damaged GlaxoSmithKline’s reputation in the Middle Kingdom, which is one of pharma’s fastest growing markets.

And prior to this the company was dogged by controversy, and lawsuits, surrounding drugs such as Paxil, with rumours about unreported side-effects.

Alongside this there have been recent patent expiries of several of its blockbuster drugs, such as Avandia, Avandamet and Ziagen. To add to this, like several UK-based companies that sell most of their products overseas, GSK has been hit by the recent strength of the pound. And as the economy continues to recover, I suspect the pound may strengthen further still.

But with an eye to the future

Yet you have to balance these medium-term headwinds with the long-term strength of Glaxo’s drug portfolio and pipeline. The firm currently has 23 treatments in Phase III development, and most of these  are biotech ones, notably antibody treatments (recognisable because they end in -ib or -ab), used to treat diseases such as cancer, asthma and arthritis, rather than the chemical drugs of old.

This shows that GSK has its eyes firmly set on the future of pharma, rather than its past. And I see its wide-ranging and complex deal with Novartis as a way of playing to its strengths.

Checking the fundamentals doesn’t help me decide. Consensus predicts a 2014 P/E ratio of 14, falling to 13 in 2015. This matches the FTSE 100 average, and there is slow growth forecast. But there isn’t, as yet, any sign of earnings taking off.

So what about the dividend? Well, I think here we do have something to shout about. With a dividend yield of 5.6%, rising to 5.8%, we see where GSK’s niche is as an investment. This is clearly one for income investors.

Foolish bottom line

I think this is a case of horses for courses. If you’re a growth investor, seeking out shares that are set to rocket over the next few years, then I wouldn’t choose GSK.

But if you’re a dividend investor, looking for a high and rising yield — and with hopefully some increase in the share price to come as well — then this really is right up n your street, and I certainly would buy GSK. It’s no surprise that this is one of City-superstar Neil Woodford’s top picks.


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Prabhat Sakya has no position in any shares mentioned. The Motley Fool has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.