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One dividend dud I’d sell to buy GlaxoSmithKline plc

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With global healthcare investment the world over continuing to move through the gears, the future remains extremely bright for the likes of GlaxoSmithKline (LSE: GSK).

The unpredictable nature of drugs development can sometimes result in huge expense and missed earnings projections through lost revenues and eye-watering research and development bills. But on the whole ‘Big Pharma’ players like GlaxoSmithKline, with their vast budgets and world-class R&D teams, prove to be dependable investments for long-term investors.

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Patent problems of course remains a colossal problem across the segment, and GlaxoSmithKline itself reported a 15% slump in sales of its previous blockbuster treatment Advair during July-September. However, the huge sums it has devoted to products in fast-growing areas like HIV, respiratory and vaccines is setting it up for exceptional long-term revenues growth (sales of these new products boomed 44% during the third quarter alone, to £1.7bn).

Sales set to slide?

I plan to look at the City’s GlaxoSmithKline’s bright earnings and dividends forecasts in some detail, but first I would like to look at a popular income pick whose star is beginning to fall: petcare retailer Pets At Home Group (LSE: PETS).

The company’s latest trading statement would suggest that investors are overreacting somewhat, however. The FTSE 250 business advised back in August that like-for-like revenues growth revved 2.7% higher during the 16 weeks to July 20, speeding up from the 1.2% rise recorded in the prior three-month period.

But is the overreaction justified? Maybe. I reckon that, with market conditions worsening considerably for Britain’s retailers since the spring, Pets At Home’s next trading statement (half-year numbers are scheduled for November 28) could reveal the emergence of fresh sales pressures.

The City is expecting earnings to shrink 10% in the year to March 2018, and another fractional decline is forecast for fiscal 2019. But on the basis of latest retail data, I believe that these forecasts could be in for a spate of downgrades in the weeks and months to come. YouGov reported on Friday that consumer confidence in the UK has this month shrunk to its lowest level since the EU referendum.

Against this backcloth I believe investors should therefore disregard Pets At Home’s low forward P/E ratio of 13.3 times, as well as its dividend yield of 4.1% through to the end of next year, and even consider selling up. And I am not alone.

Dividend dynamo

The story is very different over at GlaxoSmithKline, however. Supported by a predicted 8% earnings advance in 2017, the medicines mammoth is expected to meet its targeted 80p per share dividend. As a consequence yields ring in at a staggering 6.2%.

On top of this, it has a rosy long-term earnings outlook and strong cash generation with free cash flow during the first nine months of 2017 up to £1.6bn from £1.3bn in the same period last year. This is expected to keep dividends at a high level in 2018. And looking further down the line, the possible acquisition of Pfizer’s consumer healthcare units could provide cash flows, and thus dividends, with an extra boost.

As I said, I believe the long-term picture at the Footsie giant remains very sunny, despite the 2% bottom-line decline currently forecast for 2018. I believe GlaxoSmithKline remains a terrific selection right now, and particularly given its ultra-cheap forward P/E multiple of 11.8 times.

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Royston Wild has no position in any of the shares mentioned. 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.

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