Is Footsie dividend stalwart GlaxoSmithKline plc’s dividend under threat?

Here’s why recent positive numbers from pharma giant GlaxoSmithKline plc (LON:GSK) may not be enough to prevent it from cutting its prized dividend.

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.

With the hysteria surrounding the (somewhat inevitable) correction experienced across global markets last week, it’s easy to forget that some of the UK’s biggest companies also released some rather encouraging figures. One set of results that particularly caught my eye was from pharmaceuticals giant GlaxoSmithKline (LSE: GSK).

With the shares on a downward trajectory throughout 2017, are fears that its compellingly large dividend payments look vulnerable to a cut overdone?

Encouraging results

Based on the headline figures, this would seem to be the case, with the company revealing growth in sales and margins over the last year. New product sales were particularly encouraging, rising 44% at constant currency to £6.7bn. Glaxo will now be hoping that its three forthcoming treatments (Shingrix, Trelegy Ellipta, and Juluca) will help replicate this kind of growth going forward and provide a further boost to earnings once all are launched. Signposting an update to investors in Q2, CEO Emma Walmsley reflected that improving the company’s Pharmaceuticals business remained a priority, with particular focus to be paid on developing it respiratory and HIV treatments.  

Initial reaction to Wednesday’s numbers was positive, even if at least some of the uplift in Glaxo’s shares can probably be attributed to markets bouncing back from heavy falls over the previous two sessions. Nevertheless, it appeared that many were pleased with the company’s achievements over the last year.

So, is the dividend safe? Rather frustratingly, it’s still too early to say.

Generic threat

Although the company did manage to grow free cash flow to £3.4bn over 2017, this was still outweighed by the amount of money Glaxo returned to its loyal holders. Given that payments still aren’t sufficiently covered, it’s perhaps unsurprising that the company appears disinclined to return even more cash, announcing its intention to keep the total payout at 80p per share in 2018 (where it’s been since 2014).

While the aforementioned three new treatments may help to support dividend payouts in the future, a lot still depends on whether a generic competitor to the company’s blockbuster respiratory drug, Advair, is introduced to the US market at some point this year. If not, then adjusted earnings growth is expected to be between 4% to 7%. But if something was brought to market halfway through 2018, the company has warned that adjusted EPS could dip by as much as 3%. Given this uncertainty, it’s perhaps not surprising that some investors have voted with their feet while simultaneously bemoaning management’s desire to avoid breaking up the company in the near future.

Long-term buy

So long as your investing timeline is sufficiently long and you’re not buying its shares purely to generate an income stream, Glaxo’s shares look mightily tempting at the current time, trading as they do at just 12 times earnings. Thanks to their defensive qualities, large pharmaceuticals companies also have the potential to become increasingly attractive if recent volatility in markets proves to be longer-lasting than some are predicting.

Nevertheless, those relying on the company for dividends should ensure that their other holdings are capable of picking up the slack should Glaxo be forced to take a knife to its quarterly payouts. This is why building a diversified portfolio is so important and why it’s never a good idea to automatically chase companies offering the largest yields.

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.

Paul Summers has no position in any of the companies 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

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 »