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 HSBC 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 HSBC 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.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in HSBC 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 HSBC 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

Investing Articles

10% dividend yield! Here’s a FTSE 100 share to consider in April for passive income

This FTSE 100 stock just soared past the 10% yield mark, making it a potentially lucrative option for investors targeting…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

Here’s how Trump tariffs could hand us some top passive income bargains

As tariff terror grips the stock market, it's time for passive income investors to steel our nerves and look for…

Read more »

Investing Articles

These FTSE shares may offer some safety as Trump slaps tariffs on trading partners

FTSE shares moved lower on 3 April, after US President Donald Trump introduced hefty tariffs on its trading partners. These…

Read more »

Investing Articles

6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025

Looking for ways to generate above-average dividend income? These lesser-bought income stocks are worth a close look.

Read more »

Elevated view over city of London skyline
Investing Articles

The M&G dividend yields over 10% — and could get higher!

Christopher Ruane explains why he's upbeat about the long-term outlook for the M&G dividend yield and would happily buy the…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

2 popular UK growth stocks I wouldn’t touch with a bargepole in today’s market

Buying growth stocks can deliver market-beating returns, but this FTSE 250 pair doesn't look like a convincing investment for our…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

10 FTSE shares falling today after President Trump’s tariffs bombshell!

Our writer explains why JD Sports Fashion from the FTSE 100 and a diverse bunch of other UK stocks are…

Read more »