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.

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.

Investing For Income?

If you’re looking to supplement your salary or pension with regular dividends, then this special free investing report could be a great place to start! ‘A Top Income Share From The Motley Fool UK’ profiles a company that you’re bound to have heard of … but what you may have overlooked is the current near-6% yield on offer that our Motley Fool analyst believes is “comfortably covered by profits and by the firm’s cash flow”. Click here to claim your free copy now!

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.