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Why the GSK share price is a FTSE 100 dividend growth opportunity I’d buy today

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Even though the FTSE 100 now has a dividend yield of around 4.3% following its recent fall, it is possible for investors to obtain higher yields from some of the index’s incumbents. GlaxoSmithKline (LSE: GSK), for example, has a dividend yield of 5.4%. Furthermore, the company could offer improving dividend growth potential after a period of slow growth in this regard.

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Improving outlook

The stock in question is international defence, security, transport and energy business Ultra Electronics (LSE: ULE). It released a pre-close trading statement which showed that its performance in the year has been in line with expectations. It has experienced strong order inflow and remains focused on execution and delivery as it continues to win new business.

It is experiencing increased working capital requirements due to a higher order book, as well as underlying revenue growth and a constrained supply chain. However, it remains well-placed to capitalise on the growing US defence budget, and this could act as a catalyst on its future financial prospects.

With Ultra Electronics due to post a rise in earnings of 16% in the next financial year, the company appears to have a bright future. It has a dividend yield of 3.9% and since shareholder payouts are due to be covered 2.4 times by profit in 2019, there appears to be significant scope for further dividend growth over the medium term.

Improving prospects

The dividend growth rate of GlaxoSmithKline may also improve in future. It has spent the last few years seeking to boost its financial strength and increase its dividend coverage ratio. As a result, dividends have only been maintained, which means that the stock now has a dividend coverage ratio of around 1.4. This suggests that they are highly sustainable at their current level.

Looking ahead, the company is set to become increasingly focused on its pharmaceutical business. It recently announced plans to sell a number of its consumer healthcare brands, while it has also agreed to purchase oncology-focused Tesaro. This could boost its long-term growth prospects and may lead to a business that is better able to direct capital towards its most profitable use.

Since GlaxoSmithKline trades on a price-to-earnings (P/E) ratio of 13.2, it seems to offer good value for money at the present time. With it having exposure to a variety of regions around the world and being a company that may offer defensive credentials, it may be able to outperform a volatile FTSE 100 over the near term. In the long run, a refreshed strategy under its current CEO could reposition the company for stronger growth, which could make it a worthwhile dividend share in my opinion.

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Peter Stephens owns shares of 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.

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