I’m a big fan of investing for dividends, and high yields are the order of the day. But some yields can seem too good to be true, and I’m looking at three big ones today.
GlaxoSmithKline (LSE: GSK) shelled out for a yield of 5.8% in 2015, and current City expectations suggest shareholders will enjoy 7% for the year just ended, on a share price of 1,337p. The trouble is, the predicted 92p would not be covered by earnings of 76p per share and that’s not a recipe for sustainability — and there’s already a drop to 82p (still a handsome 6.2% yield) forecast for 2016.
But Glaxo’s dividends might well hold out because of the reason for its falling earnings, and that’s the expiry of some key patents over the past couple of years and a need to strengthen the firm’s drug development pipeline. There have definitely been some encouraging trial results coming through over the past 12 months, and in outlining its R&D portfolio in November Glaxo claimed that “40 potential new medicines and vaccines offer significant opportunity to drive long-term performance“.
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There’s a return to earnings growth on the cards for 2016, so could GlaxoSmithKline really be a good long-term income investment? I think it could.
Publishing rut
Educational publisher Pearson (LSE: PON) has seen its shares hammered by more than 50% since a high in March 2015, to 698p today. But one upside is that it’s pushed the expected 2015 dividend yield up to 6.9%. And what’s more, it would be covered around 1.3 times by predicted earnings. But having said that, we’re still way behind the two-times cover we were seeing before the falls in EPS of the past few years, and I’m not sure Pearson will want to keep handing over cash at such a relatively low cover level for much longer.
At Q3 time, Pearson reported a reasonable performance, but warned that markets are still quite tough and cyclical issues were yet to improve. But even if the firm is facing another couple of fairly flat years, a P/E of under 11 could still look attractive if it can can keep its dividend payments going throughout the lean spell.
A high-yield bank
My third is HSBC Holdings (LSE: HSBA), the bank that has been hit due to its connections with China. HSBC’s shares are down 15% over 12 months to 499p, and down 25% over two years.
But we’re looking at a bank that has a nicely progressive dividend policy, upping its annual cash payout ahead of inflation most years. The City’s analysts are calling a 6.4% yield for 2015, with about the same to follow in 2016, and the dividends would be covered approximately 1.6 times and 1.5 times respectively. That level of cover is not as high as we expect in the longer term from the likes of Barclays and Lloyds Banking Group, so I think we’d need to see some earnings growth in the next few years for the cash to be sustained.
The big unknown for HSBC right now, of course, is the extent of its exposure to possible bad debt in China should that country’s financial systems start to unravel in any way approaching the recent Western meltdown.
