GlaxoSmithKline (LSE: GSK) plans to split into a consumer healthcare and a riskier biopharma company some time in 2022. Shareholders in Glaxo have been told that dividends are expected to be maintained at 80p for 2021. However, there has been a warning that aggregate dividends are likely to fall after the split. A breakup and dividend cut on the cards has probably got a lot to do with the Glaxo share price sliding over the course of a year.
New Glaxo stocks
The new biopharma company, despite the plans for lower leverage, will be riskier. Drug development is costly, and payoffs are uncertain and lumpy. There will be no stable consumer healthcare cash flows to offset this. A stable dividend policy will be difficult to maintain, and at least initially, payments will likely be low or nothing. The consumer healthcare company is unlikely to be able to make up the shortfall on its own. That makes the 67p combined 2022 dividend that analysts expect seem reasonable.
But, 67p is an implied 2022 dividend yield of 5.5% on Glaxo’s current share price of 1,212p. The split might be difficult, and the combined shares are likely to be more volatile. But, trading at a modest 11 times trailing twelve-month earnings, I think Glaxo stock looks cheap because I think the two independent companies can flourish. You can read more about my decision to continue buying Glaxo stock here.
Aviva (LSE:AV) paid its shareholders an interim dividend of 7p, on January 21, 2021. A final dividend of 14p is expected to be announced with full-year results in March. The implied dividend yield on Aviva stock sits around 5.7% on a share price of 368p, which is impressive. Given that Aviva shares are also trading at 6.78 times trailing twelve-month earnings, I think they look cheap and would consider topping up my own holding.
But Aviva did cut its dividend last year. That took the total number of dividend cuts to three within the last ten years. If in March Aviva does end up paying a 2020 dividend of 21p, that only takes payments back to 2015 levels.
Yet, I think there is good reason to believe the Aviva dividend will be maintained and possibly grow going forward. Aviva’s CEO has been in office for less than a year but has been busy selling unwanted businesses in Singapore, Italy, France and Turkey. This is all part of a plan to refocus Aviva on its core markets in the UK, Ireland, and Canada and pay down debt. Shareholders can expect dividend growth to be linked to performance in core markets and be “in the low to mid-single digits”.
Cheap stock to buy?
Although Aviva does look like a cheap dividend-paying stock, I am mindful that the insurance industry is at risk of regulatory changes, especially since the UK has left the EU. Changes could affect Aviva’s dividend. When Aviva sold its French business for €3.2bn, it agreed to a specific indemnity concerning “known price” arbitrage contracts over and above existing provisions. Although Aviva believes the risk is minimal, it is possible that legal rulings could increase the indemnity risk substantially.
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James J. McCombie owns shares of GlaxoSmithKline and Aviva. The Motley Fool UK 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.