Should You Believe The Monster Yields At GlaxoSmithKline plc And BP plc?

A flurry of dividend cuts across the FTSE 100 has caused investors to become increasingly sceptical over the payout forecasts for many of Britain’s leading blue-chips.

Medicines giant GlaxoSmithKline (LSE: GSK) and oil mammoth BP (LSE: BP) are two such stocks that have come under rising scrutiny from income chasers. But are these concerns truly merited?

A drugs delight

GlaxoSmithKline tried to assuage market nerves last May by pledging to fork out a dividend of 80p per share through to the close of next year.

The drugs manufacturer made good on this promise in 2015, and the City expects GlaxoSmithKline — supported by an expected return to earnings growth this year — to keep this trend going. Consequently the business sports a colossal yield of 5.3% for the period.

Still, fears over major patent losses continue to cast a cloud over GlaxoSmithKline. For instance, sales of the firm’s blockbuster Advair drug slipped to £3.7bn last year, down almost a third from 2013 levels. And the huge costs associated with pharmaceuticals development is prompting further concerns over whether GlaxoSmithKline can maintain the dividend.

But on the plus side, I believe investors should take heart from the company’s rapidly-improving product pipeline. GlaxoSmithKline is confident of submitting 40 major products for approval by 2025. And a stream of regulatory sign-offs in recent months bolsters my faith that GlaxoSmithKline has what it takes to get the top line shooting higher again.

Allied to its improving earnings outlook, GlaxoSmithKline’s tie-up with Novartis has provided a significant boon to the balance sheet — net debt dropped 26% last year to £10.7bn.

I reckon the drugs giant has the financial strength meet its near-term dividend goals, and fully expect GlaxoSmithKline to significantly hike the dividend further out as its new revenues drivers hit the market.

Set to sink?

I’m not so confident over the payout picture at BP, however. GlaxoSmithKline can look to galloping global healthcare demand and a raft of new drugs hitting the pharmacy shelf. But I believe the massive supply imbalance washing over the oil market puts BP’s earnings forecasts — and consequently its dividend prospects — in serious jeopardy.

BP chairman Carl-Henric Svanberg failed to calm investor concerns over the dividend at Thursday’s AGM. He said: “Our goal is to maintain the dividend, but at the same time we must secure the future by investing wisely.” Svanberg added that “should the oil price remain lower, longer than expected, we will need to revisit our financial framework.”

Sure, the number crunchers may expect BP to match 2015’s dividend of 40 US cents per share in the current period, yielding a terrific 7.8%. But with brokers predicting earnings of just 17 cents for 2016, the alarm bells are certainly ringing in my head.

BP hardly has the financial clout to overcome these earnings troubles — the oil giant saw net debt balloon by a fifth last year, to $27.2bn.

And I reckon the balance sheet is likely to worsen in the near-term and beyond, as crude prices look set to wallow and the cash-sapping nature of BP’s operations adds further pressure. I expect these issues to significantly dent dividends in the coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP 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.