Is GlaxoSmithKline plc’s Dividend Safe?

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has had a bad time of it this year, being charged with bribery in China and losing patent protection on blockbuster drug Advair, which accounted for £5bn worth of sales in 2013. This pressure on earnings has brought the dividend under pressure, with the payout now eating up 90% of earnings. With profits forecast to drop a further 14% in 2015, it is possible the dividend will be funded through the balance sheet at some point in the short term.

However, even with all this bad news surrounding the company, I believe the shares are a firm buy. The news is out in the open, and the shares have fallen on the back of it. GlaxoSmithKline is a quality company trading at on a P/E of 12 and I believe the dividend is unlikely to be cut. Here is why.

Copious Cash

The dividend looks supported by some serious cash flowing through the business, rendering the earnings coverage not so worrying in the short term. The company generated £7,222m cash from operations last year, covering the dividend of £3,789m nearly twice.

This is comforting , but even if cash flow proves to be insufficient, the company has another route to payment.

Short-Term Asset Sales To Steady The Ship

The company intends to float its stake in HIV treatment company ViiV Healthcare. Sir Andrew Witty, CEO, predicted ViiV could be worth more than Marks & Spencers! The sale, which could raise between £10bn and £15bn, looks likely to go through in 2016, so if the company can support the dividend for another year cash from the IPO could pick up the slack.

R&D Excellence

Since 2009, GlaxoSmithKline has blown away all competitors, achieving approval for more New Molecular Entities, or new drugs, than any other pharmaceutical company. Even more promisingly, the company has another 40 NMEs in late stage testing that could become profitable treatments over the next few years.

Furthermore, a robust portfolio of seven respiratory drugs should go some way to replacing the revenue from Advair and also cement Glaxo’s leading position in the area.

More Than Just A Dividend Play

If you are buying GlaxoSmithKline purely for the yield, and not the longer-term recovery and rerating, I would pause for thought. There is no guarantee the dividend will continue to be paid, and while a cut looks very unlikely, Glaxo has more to offer than a fantastic yield.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.