Should You Buy High-Yielding GlaxoSmithKline plc, Vodafone Group plc & Berkeley Group Holdings plc?

How reliable are the dividends from GlaxoSmithKline plc (LON:GSK), Vodafone Group plc (LON:VOD) and Berkeley Group Holdings plc (LON:BKG)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

GSK

Declining sales and earnings have forced GlaxoSmithKline (LSE: GSK) to freeze its dividend at 80p per share until 2017. As profitability for the company has not recovered as quickly as previously anticipated, GSK has been unable to fund its dividend entirely through free cash flow. It has also had to cut back on its plans to return shareholders with £4 billion of the net proceeds from the sale of its oncology business to Novartis. It now plans to return just £1 billion to shareholders, through a special dividend, which would be paid alongside its usual Q4 2015 ordinary dividend.

Declining earnings and sales has been a constant theme over recent years, as the sales of new drugs have not been able to offset the loss of sales from blockbuster drugs that have lost patent expiration. Sales of Advair, GSK’s best-selling respiratory drug, continued to decline in the second quarter of 2015, having fallen 17% to £484 million.

Analysts currently expect adjusted EPS will fall 21% this year, to 75.5p, which means its ordinary dividend would no longer be fully covered by earnings. Earnings is projected to recover 12% in the following year to 84.5 pence, but that only leaves its dividend cover ratio at 1.06x.

But, although dividend cover is weak in the near term, it will not likely stay that way. GSK has a pipeline of 40 new drugs, which should mean the company would be able to sustain modest growth in earnings over the next few years. This should mean GSK’s yield of 6.1% is not only sustainable, but likely to grow further in the longer term.

Vodafone

Weak trading conditions has also meant Vodafone (LSE: VOD) has not been able to fund its dividends through free cash flows for a number of years now, but that does not mean its dividends are unsustainable. Having sold its US joint venture with Verizon, Vodafone has net debt to EBITDA of just 1.9x, which is significantly lower than many of its peers in Europe and North America.

Vodafone is showing signs that trading conditions are beginning to turn around, with organic group service revenue in the quarter to 30 June growing 0.8%, its fastest rate for almost three years. On top of this, it has also been making acquisitions into the European broadband and paid TV market, allowing it to bundle various services together, and this should help it to reduce customer churn rates and develop stronger pricing power over its customers.

Analysts expect Vodafone’s underlying EPS will fall 6% this year, to 5.2p, before recovering 20% in the following year, to 6.2p. Shares in Vodafone have a lower prospective dividend than shares in GSK, at 5.6%, but Vodafone is expected to continue to grow its dividend by about 2% over the next two years.

Berkeley Group

Although housebuilding shares are not generally regarded as income stocks because of their cyclical nature, the growing profitability of the sector has meant free cash flow is often well in excess of its development capital needs. And, this has enabled many of them to pay some very handsome dividends.

London housebuilder Berkeley Group (LSE: BKG) has been benefiting from an increase in new home completions, causing its earnings to grow 44.6% in its 2014/5 financial year. Despite the recent turmoil in global stock markets and the anticipation of higher interest rates in the UK, Berkeley Group’s outlook remains very attractive.

Analysts have increased their forecasts on the housebuilder’s earnings, and they now expect underlying EPS will be 278.1p, which implies a forward P/E of just 12.2. In addition, Berkeley intends to pay 433p in dividends per share over the next three years, which implies a prospective dividend yield of 4.3%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings and 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »