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?
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.
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.
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.
How to avoid losing money on the markets
Failing to check whether a company is likely to be able to honour its dividend policy can leave investors nursing losses if and when a cut is made.
If you're looking to avoid this and other expensive errors during your time on the market, don't leave before downloading a special report penned by the Fool's analysts.
"The Worst Mistakes Investors Make" is completely FREE to read, comes without any obligation whatsoever and could save you a huge amount of money over time.
Just click here and it's yours.
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.