Why I’d buy GlaxoSmithKline plc for its 5%+ dividend yield today

Edward Sheldon explains why he sees appeal in GlaxoSmithKline plc’s (LON:GSK) 5.4% dividend yield.

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.

GlaxoSmithKline (LSE: GSK) shares have endured a rough three-month period, falling from above 1,700p to just 1,470p today, a decline of almost 15%. Given that the pharmaceutical stock is a popular pick among UK investors due to its high dividend yield, does the share price fall represent a buying opportunity?

5.4% dividend yield

While GlaxoSmithKline no doubt pays a chunky dividend, the stock is far from the perfect dividend stock, in my view. Sure, a trailing dividend yield of 5.4% looks attractive in the current low-interest-rate environment, but when we dig further into the dividend details, we can see that coverage in the last two years has been thin. Indeed, Glaxo generated core earnings per share of 75.7p in 2015 and 102.4p in 2016, resulting in dividend coverage of just 0.95 and 1.28 times over the last two years. A level below 1.5 is generally considered to be risky.

Furthermore, the company hasn’t increased its dividend for three years now, paying 80p per share for 2014, 2015 and 2016. Tesco shareholders may recall the supermarket doing the same thing between FY2012-FY2014, before cutting its payout dramatically the next year. GlaxoSmithKline recently advised that dividend growth will be put on hold until free cash flow cover of the dividend is in the target range of 1.25 to 1.5 times.

Having said all that, I’m not ready to sell my GlaxoSmithKline shares just yet.

With the number of people aged 65 or older across the world set to double by 2050, demand for healthcare should remain robust. As a result, I’m bullish on the long-term prospects of the healthcare sector. While GlaxoSmithKline may be struggling a little now, I’m willing to give the pharmaceutical giant time to rebuild itself into a stronger, more balanced business.

Management stated in the July half-year report, that it “recognises the importance” of dividends, and that a payment of 80p can be expected this year and next, “subject to any material changes in the external environment or performance expectations.” City analysts anticipate dividend coverage improving this year, with the consensus earnings figure of 110.8p, giving a coverage ratio of a slightly more healthy 1.39.

So while dividend growth may be a while off, I believe GlaxoSmithKline’s yield still looks attractive in today’s low yield environment. On a forward P/E of 13.3 times, the stock offers long-term value, in my view.

A 6.3% dividend yield 

Turning to another high-yield dividend stock, River and Mercantile (LSE: RIV) released preliminary full-year results today, and it appears that the investment manager has strong momentum.

The company generated adjusted underlying profit before tax of £16.4m, up from £11.1m last year, and adjusted basic earnings per share rose to 22.9p, up from 11.62p last year. The board today declared a second interim dividend of 8.1p, of which 2.8p was a special dividend, as well as a final dividend of 6p, of which 2.8p was a special dividend. Adding these to the interim dividend of 5.6p the company declared in February, and the total FY2017 dividend payout was 19.7p, equating to a stunning dividend yield of 6.3% at the current share price.

River and Mercantile has enjoyed strong growth in assets under management over the last three years, and while there’s no guarantee the company will pay such strong dividends in the future, on a P/E ratio of 13.8, I believe this small-cap cash cow could be worth a closer look.

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.

Edward Sheldon owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

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

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »