Why I’d still buy GlaxoSmithKline’s 4.8% dividend yield for my ISA

GlaxoSmithKline plc (LON: GSK) is focused on strengthening its R&D pipeline alongside the execution of new product launches.

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.

Today’s second-quarter and half-year results from pharmaceutical giant GlaxoSmithKline (LSE: GSK) reveal to us a mixed bag of numbers. Revenue in the first six months of the year rose 5% at constant exchange rates compared to the equivalent period last year and adjusted earnings per share moved 11% higher.

A battle to rebuild revenues and profits

The news isn’t so good on cash flow, though. Net cash from operations declined 8% and free cash flow declined by 35%. Given that companies generally use their free cash flow to pay shareholder dividends, it’s no surprise that the dividend will be 19p, leading to an anticipated 80p total dividend for the year. The dividend has been frozen yet again, which is a situation that extends back around five years.

In common with other large, established pharmaceutical outfits, the story of GlaxoSmithKline is one of a battle to rebuild revenues and profits. Shrinking income from one-time best-sellers has been dragging on the financial results for years now because of the loss of patent protection on older products. Meanwhile, the company is fighting to replace lost turnover by developing and bringing new drugs to market.

Chief executive Emma Walmsley said in the report that the firm saw “good” operating performance in the second quarter despite the loss of exclusivity of Advair.” The outcome has encouraged the directors to increase their expectations for the year. But even now, it’s nothing to get excited about. Adjusted earnings per share will likely decline between 3% and 5% at constant exchange rates, but that’s better than the 5% to 9% decline previously expected.

Slow recovery

As for a long time, shares in GlaxoSmithKline will not keep you awake and buzzing at night as you watch them shoot for the sky. But you probably won’t spend too many sleepless nights worrying about them either. I think that’s a good reason to hold them, for me. The dividend is chunky and keeps on coming. Although it hasn’t grown for a while, the payment hasn’t been cut either. Meanwhile, the share price has been creeping up. If you’d held for the past 10 years, you’d be up nearly 60% on the share price, which would have combined nicely with your dividend income gains.

I believe the firm is moving to a better place operationally even though the pace seems slow. Walmsley assured us in the report that GlaxoSmithKline is focused on strengthening its R&D pipeline alongside the execution of new product launches. She said that positive clinical data this year offers “significant new opportunities for products in Oncology, HIV and Respiratory.” On top of that, more readouts should come through in the second half of the year. 

As well as the R&D pipeline, shareholders could see value created by the upcoming completion of the firm’s joint venture with Pfizer “laying the foundation for the creation of two great companies: one in Pharmaceuticals/Vaccines; one in Consumer Healthcare.”

At today’s share price close to 1,658p, the forward-looking earnings multiple for 2020 is just over 14 and the anticipated dividend yield is around 4.8%. I think that valuation looks undemanding and I’d still buy shares in GlaxoSmithKline.

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.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »