Why GlaxoSmithKline plc And Imperial Tobacco Group PLC Are Perfect Partners For Income Investors

GlaxoSmithKline plc (LON:GSK) and Imperial Tobacco Group PLC (LON:IMT) form a potent income combo.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Dividend disappointments have come thick and fast in recent years. And even though recovery from the financial crisis and recession rolls on, income investors continue to see the dividend axe fall with monotonous regularity.

Already this year, we’ve seen Tesco decide not to pay a final dividend and give no timescale for when payouts might resume, Centrica rebase its dividend 30% lower, Severn Trent announce a 5% rebase and a reduced growth commitment, Sainsbury’s deliver a dividend 24% below last year’s level, Morrisons warn of a cut of up to 63% for the coming year … and so the list goes on.

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) hasn’t cut its dividend, but has recently dampened shareholders’ previous expectations of the level of cash returns in the pipeline. The company said it anticipates pegging the annual dividend at 80p a share for each of the next three years (2015-17). Management also said that a previously-guided c. 80p a share capital return this year will be dropped and replaced by a 20p special dividend.

Should you invest £1,000 in AstraZeneca right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if AstraZeneca made the list?

See the 6 stocks

On the positive side, retaining more cash within the business — while the company gets through a period of expiring patents — is a reassurance for investors who had been getting jittery about debt and low dividend cover. We now have good visibility on what income we can reasonably expect (affordability now looks much better) for the next three years.

While a static dividend isn’t ideal for income investors, Glaxo’s yield is high. Furthermore, I think pairing the pharma giant with Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US) — which has a commitment to grow dividends by at least 10% a year “over the medium term” — should provide income seekers with a powerful combination of a well-above-average starting yield and steady, above-inflation annual income growth for the next three years … and, hopefully, beyond.

The table below shows dividend expectations for the next three years, based on Glaxo’s guidance and Imperial’s policy of growth of at least 10% a year (I’ve used 10% in the calculations, so the payouts could be higher).

Company 2015 2016 2017
Glaxo 80p* + 20p special 80p 80p
Imperial 140.9p** 155.0p 170.5p

* The ex-dividend date for Glaxo’s first quarterly dividend of this year is 14 May.

** The ex-dividend date for Imperial’s first quarterly dividend of this year is 28 May.

So, let’s have a look at how the above would translate into starting yield and annual growth for anyone investing before 14 May (Glaxo’s first ex-dividend date), based on the share prices of the two companies at the time of writing.

Company Share price 2015 yield 2016 yield 2017 yield
Glaxo 1,477p 5.42% (6.77% including special) 5.42% 5.42%
Imperial 3,296p 4.27% 4.70% 5.17%
Combined n/a 4.85% (5.52% including special) 5.06% 5.30%

This looks an attractive income proposition from two defensive businesses; and one would hope that after three years Glaxo would be in a position to start increasing dividends again.

Of course income from shares is never 100% guaranteed, but I think this equity pairing could be well worth considering as an addition to a portfolio of income-generating assets.

Should you invest £1,000 in AstraZeneca right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if AstraZeneca made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Santa Clara offices of NVIDIA
Investing Articles

Down 28%, is Nvidia stock a bargain – or a value trap?

Nvidia stock has crashed this year -- but it's still a star performer over the long term! So, is this…

Read more »

Investing Articles

£10k invested in Barclays shares at the start of 2025 is now worth…

Harvey Jones says Barclays shares were unlikely to continue 2024's blistering run, given all the uncertainty out there. Yet long-term…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Here’s how a first-time investor could start buying shares with £3k

Is it possible to start buying shares with £3K? Yes it is -- and here our writer goes into some…

Read more »

ISA Individual Savings Account
Investing Articles

Thinking of starting a Stocks and Shares ISA this April? Avoid these 4 mistakes!

A Stocks and Shares ISA can be a way for an investor to try and build wealth over the long…

Read more »

ISA coins
Investing Articles

Here’s how to build a £100k ISA starting with £5k today

Increase an ISA's value 20-fold? It need not just be the stuff of dreams, according to this writer -- though…

Read more »

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

6.9% yield! I just added this share to my SIPP

In a turbulent stock market, our writer has been hunting for bargains to add to his SIPP. After a 31%…

Read more »

piggy bank, searching with binoculars
Investing Articles

With Rolls-Royce shares moving up again, is a £10 price target back on the horizon?

Rolls-Royce shares wobbled when President Trump dropped his tariff bombshell on us. But three weeks is a short time in…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

2 UK stocks to consider buying as the market sell-off continues

Stephen Wright thinks investors looking for opportunities might be able to take advantage of short-term weakness in some UK stocks.

Read more »