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How Safe Are GlaxoSmithKline plc And AstraZeneca plc’s Dividends?

Dividend seekers were shaken up this week by the news that Centrica has slashed its final dividend after recording a big fall in profits. Utilities suppliers have traditionally been seen as very safe providers of income, but this shows we can never be too certain. So where else should we look for safe dividends?

The FTSE 100‘s two big pharmaceuticals companies, GlaxoSmithKline (LSE: GSK)(NYSE: GSK.US) and AstraZeneca (LSE: AZN)(NYSE: AZN.US) have traditionally been seen as solid cash generators, but the shine wore off them a little as they both struggled with the expiry of patent protection on key drugs and the increase in competition from generics.

Dividends solid

GlaxoSmithKline has actually kept its dividend growing, but back in 2010 it wasn’t covered by earnings. And though 2011 got things back on track, falling earnings for the next three years took cover down to just 1.2 times — and there’s cover of only 1.1 times forecast for 2015 as EPS is set to fall for a fourth consecutive year.

At AstraZeneca things have been looking scarier, with the annual cash payout having been unchanged since 2011 — and we have at least two more years of no dividend rises forecast. At least at AstraZeneca the dividend cover has not been a problem. 2011’s payment was covered 2.6 times by earnings, and though we’ve seen EPS sliding since then we still had cover of 1.5 times for 2014 — and when EPS is expected to bottom out in 2016, predictions suggest 1.45 times.

The big question has been whether the two would be able to keep the dividends going until profits started to turn upwards again — and I think the answer is a very definite yes.

Back to earnings growth?

There’s a 5% EPS drop expected from Glaxo this year, but the pundits think that will be reversed in 2016 — and at 2014 results time the firm said it expects pressures to continue into 2015 but said “we expect a stronger performance in the second half of the year“. Glaxo’s development pipeline is really starting to look better now too, with a number of significant new drugs launched in the past 12 months, including “the very successful launches of Tivicay and Triumeq” HIV treatments.

At Astra the turnaround has been nothing short of dramatic, and new boss Pascal Soriot has refocused on the blockbuster drugs model while offloading some lower-margin businesses — and approvals for new drugs are coming thick and fast from a seriously revamped pipeline. Astra should be back to earnings growth in 2017, though some optimists are hoping it might come a year sooner.

Confidence

The share prices have been rising, with Astra up 12% over 12 months to 4,430p and Glaxo enjoying a late blip of 17% since mid-December, so confidence seems to be returning.

With Glaxo offering a forecast yield of 5.2% and Astra on a more modest but still decent 4%, I don’t see any worries for income seekers from these two.

Safe dividends and a return to growth from GlaxoSmithKline and AstraZeneca could lead you to Buffett-style wealth.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK 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.