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Should You Buy These Dividend Favourites? GlaxoSmithKline plc, Diageo plc And Aberdeen Asset Management plc

GSK

GlaxoSmithKline (LSE: GSK) has pledged to keep its dividend at 80p per share until 2017, despite declining earnings and rapidly falling dividend cover. Many analysts have recently lowered their estimates for GSK’s earnings in 2015 and 2016, as generic competition for GSK’s blockbuster respiratory drug, Advair, has been much tougher than originally expected.

But there is cause for optimism. GSK has a pipeline of some 40 new drugs that are in late-stage clinical trials, and the recent release of new positive data for three of its next-generation respiratory drugs — Breo, Anoro and Incruse — should help GSK to gain market share and offset declining Advair sales.

Analysts expect GSK’s underlying EPS will decline by 20% in 2015, to 75.9p, which implies its shares trade at a forward P/E of 17.7. But in 2016, earnings are expected to rebound by 11%, to 84.3p. And on that forecast, its forward P/E will fall to a more reasonable 16.0.

Shares in GSK have a prospective dividend yield of 6.0%.

Diageo

Diageo (LSE: DGE) is seeing growth slow, too. The company reported a 5% increase in net sales for the year ending 30 June, but this was primarily due to its consolidation of United Spirits revenues in its own figures. Organic net sales was actually flat, with Diageo reporting a 1% drop in shipment volumes.

Recent adverse currency movements and slowing emerging market economies are largely to blame, but changing consumer tastes and brand fatigue are also factors. Diageo has been slow in gaining a foothold in the growing bourbon market in North America, where sales of Diageo’s Johnnie Walker scotch, Smirnoff vodka and Captain Morgan rum have been making double digit declines.

On the upside, productivity gains and price increases have led to an expansion of operating margins. Its organic operating margin increased 24 basis points in the year and now stands at 28.35%. This demonstrates the company’s competitive advantage and its wide economic moat.

Shares in Diageo are expensive, though, trading at 20.6 times its prospective 2015/6 earnings, against an average forward P/E of 15.4 for the FTSE 100. Its prospective dividend yield is also not the most attractive, at 3.3%, but at least it is still growing.

Aberdeen Asset Management

Aberdeen Asset Management (LSE: ADN) has been hard hit by recent capital outflows from emerging markets. Trading conditions are set to get even worse, as investors will likely want to reduce their exposure to Asia and emerging markets in anticipation of a US interest rate rise.

But times of economic weakness often provide the most rewarding investing opportunities. The lower valuation multiples in emerging markets will, at some point in time, prompt a change in market sentiment.

Aberdeen is expected to see underlying EPS fall 8% this year, to 29.6p. In 2016, underlying EPS is predicted to fall another 12%, to 26.2p. As a result, its shares trade at forward P/E ratios of 11.6 and 13.6 times their respective 2015 and 2016 earnings.

Although earnings are set to trend downwards, Aberdeen will still be able to maintain its progressive dividend policy. Even as analysts expect Aberdeen will increase its dividend by 6% this year, its dividend cover is expected to fall to just 1.7x. Its shares have a prospective dividend yield of 5.6%.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Aberdeen Asset Management 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.