High dividend yields aren’t always a good thing. We all want to chase the highest paying stock, but sometimes that isn’t the best course of action. That’s because struggling companies might boost the yield to attract investors and sometimes the yield is high simply because the share price has fallen due to the company struggling.
So dividend sustainability is key. Can the business afford its dividend or is a cut on the horizon? A company’s recent history will tell you whether the dividend is sustainable and if the stock is worth your money. Here are two I think are worth the price.
Pharmaceutical giant
GlaxoSmithKline (LSE: GSK) is my first pick, with its tempting dividend yield of 5.5%. It is currently priced at around 1,600p with a P/E ratio of around 20, not the best-looking P/E in the world, but I believe that even with its high price it can still reward investors. GlaxoSmithKline has steadily been paying dividend yields of around 5% to 6% for years now, reliably paying around 80p per share year after year. This reassures me that, despite market fluctuations, GSK can still bring in the money.
Such a high dividend could fluctuate, but CFO Iain MacKay has confirmed GSK’s commitment to the yield for this year. And the future? It has many products that are seeing great results with Ellipta respiratory sales climbing 20% and Nucala seeing 40% growth in Q1 this year. The company has three main areas of income that provide a safety net: consumer healthcare, vaccines and pharmaceuticals. Vaccines sales soared in Q1 due to the Shingrix shingles treatment. This vaccine accounted for £365m of sales, up from £110m in Q1 of 2018, which is more than a fifth of all vaccine revenue for the firm. Vaccine sales as a whole were up 23% in Q1. This huge amount of cash flow helps sustain a healthy dividend yield I believe is worth paying a high price for.
Reality show
ITV (LSE: ITV) is my next pick, with its mouthwatering yield of 7.6%. ITV shares are currently priced around 106p with a P/E ratio of 11.9. That ratio is lower than the UK average and the company has reasonable long-term debt levels of £981m with £424m operating cash flow in the last 12 months. This means an operating-cash-to-total-debt ratio of 40%, demonstrating how the debt is significantly covered.
ITV did well in Q1. Despite total national television viewers dropping 3%, its share of these views rose 24%. Registered ITV hub users have also risen by 29% this year, with statistics showing that there’s at least one ITV hub account in every UK household. These figures highlight how the company has an in-depth share of (and insight into) our TV habits. This is important as it plans to launch targeted ads on the hub accounts that should hopefully boost revenue this year, reassuring investors, despite the challenging TV advertising market.
Furthermore, the return of Love Island has also seen a huge boost in viewership, keeping ITV ahead during prime time TV hours. That upcoming launch of ITV hub tailored ads and an admittedly-modest 1% increase in revenues in Q1 shows the company has growth prospects ahead. With ITV stock prices being so low and a healthy dividend, I think that this undervalued investment is far too tempting to ignore.
