I’m looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends.
Today, I’m putting GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) under the microscope.
Dividend policy
GSK’s current dividend policy has been around for some years. Management said within the company’s 2012 annual report:
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“Free cash flow is available to invest in the business or to return to shareholders consistent with maintaining our targeted credit profile. The priority is to cover the dividend but we intend free cash flow above and beyond this requirement to be available for share buybacks or bolt-on acquisitions, wherever the most attractive returns are available”.
Delivery of the policy
The table below shows the dividends shareholders have received and the growth of their income over the past four years.
| 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|
| Dividend per share | 61p | 65p | 70p | 74p |
| Dividend growth | 7.0% | 6.6% | 7.7% | 5.7% |
As you can see, shareholders have done rather well, with annual income increases comfortably ahead of inflation. But let’s look at some of the other key numbers to which management refers in relation to the dividend policy
| 2009 | 2010 | 2011 | 2012 | H1 2013 | |
|---|---|---|---|---|---|
| Free cash flow (£bn) | 5.3 | 4.5 | 4.1 | 2.1 | 1.7 |
| Dividends (£bn) | 3.0 | 3.2 | 3.4 | 3.8 | 1.9 |
| Share buybacks (£bn) | 0.0 | 0.0 | 2.2 | 2.5 | 0.4 |
| Net debt (£bn) | 9.4 | 8.9 | 9.0 | 14.0 | 15.7 |
GSK’s free cash flow (FCF) has declined annually between 2009 and 2012. A particularly large drop during 2012 to £2.1bn meant the company fell short on the board’s “priority” for FCF “to cover the dividend”; the dividend was £3.8bn.
Furthermore, while management has said that FCF “above and beyond” the dividend payout would be available for share buybacks, the company has, in fact, bought back shares only partly covered by FCF (after the dividend) during 2011 and wholly in excess of FCF during 2012. This is reflected in the £5bn leap in net debt between 2011 and 2012.
GSK’s interim results announced last week showed first-half dividends (£1.9bn) again uncovered by FCF (£1.7bn), share buybacks continuing (£0.4bn) and a further rise in debt (to £15.7bn).
What’s ahead?
Is GSK’s dividend safe? Well, it certainly doesn’t look as safe as it did three or four years ago. However, management has a few weapons in the armoury to raise more cash, including the sale of non-core brands Lucozade and Ribena — expected to happen this year — which could generate £1.5bn or more. The company can also take on more debt. Despite increasing its borrowings substantially of late, finance costs have not risen a great deal because interest rates are so low.
Essentially, GSK has to perform a bit of a balancing act to keep the dividend growing until some of the drugs within its strong pipeline — including nine in final (Phase III) trials — come to market. While the company doesn’t have the most secure dividend around, City analysts are generally of the view that GSK’s management will deliver. The consensus is for a 4.5% uplift in the dividend this year, followed by a 6% rise for 2014.
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> G A Chester does not own any shares mentioned in this article.
