The Motley Fool

Is GlaxoSmithKline’s 5% dividend yield safe?

In February’s full-year results statement, pharmaceutical giant GlaxoSmithKline (LSE: GSK) said it expects adjusted earnings per share to decline between 5% and 9% in 2019. The damage will come from increased competition following the approval in the US of a generic competitor to the firm’s Advair brand.

It seems that the company is not out of the woods yet when it comes to all the patent expiry headaches that have allowed cheaper competition to flood the market and erode GlaxoSmithKline’s profits.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

However, chief executive Emma Walmsley explained in the report that the firm is making decent progress rebuilding its pharmaceuticals pipeline.

A static dividend

City analysts following the firm reckon GlaxoSmithKline will pay a dividend of 80p for 2020. At today’s share price of 1,593p, the forward dividend yield is running at just over 5%. Earnings should cover the payment almost 1.5 times, which seems comfortable.

But the dividend has been flat for some time and earnings a little erratic:

Year to December

2014

2015

2016

2017

2018

Dividend per share

80p

80p

80p

80p

80p

Normalised earnings per share

65.4p

54.7p

32.8p

94.7p

90.5p

However, cash generation appears to support earnings well, which is one of the things that investors have come to rely on. The pharmaceutical sector is known for its defensive qualities and steady incoming cash flow. That’s important for supporting a dividend-led investment because cash pays the dividend, not earnings on a profit & loss statement.

Year to December

2014

2015

2016

2017

2018

Operating cash flow per share

106.4p

52.6p

132.3p

140p

169.4p

Net borrowings (£m)

14,377

10,727

13,804

13,178

22,106

One thing I’m not so keen on is the big leap up in net borrowings that occurred during 2018. Interest payments on the debt will compete with the dividend for the firm’s incoming cash flow.

Turning around?

GlaxoSmithKline has been struggling to grow for some time and City analysts following the firm are not expecting earnings or the dividend to advance over the next couple of years. The share price has been broadly flat for more than a decade too, and I can’t see that changing soon.

The big hope is that growth will emerge eventually, perhaps driven by new breakthroughs from the research and development pipeline. I’d rather see earnings and the dividend rising a bit each year with my dividend-led investments and GlaxoSmithKline falls short of that requirement. However, cash flow seems to be holding up so the static dividend looks safe, at least for now.

The firm has been trying to turn itself around for years but the pace of change is slow. Recent news of plans to combine the company’s consumer health businesses with that of Pfizer in a new joint venture could help unlock value. Maybe growth will return, but I think there is a risk that the share price could drift lower in the meantime if progress continues to be elusive. If that happens, capital losses could wipe out some of your dividend gains.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Kevin Godbold has no position in any share 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.