Pharmaceuticals giant GlaxoSmithKline (LSE: GSK) has been attractive to income hunters for a while thanks to its tasty dividend. It has just announced a big increase in its quarterly dividend. But on closer examination, I do not think this is as attractive as it first sounds.
The GSK dividend is flat
For its fourth quarter, the dividend per share was announced at 23p, compared to 19p per share in the prior quarter. That makes it sound as if the dividend has increased 21%.
But that is not really the case. The company often pays out a higher quarterly dividend in its fourth quarter. So while 23p is higher than the last quarterly dividend, it is the same as the fourth quarter dividend paid last year. The total dividend for the year comes out at 80p per share. That is exactly the same as last year and, in fact, the past few years before that.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
That still equates to a dividend yield of 4.9%. I do find that attractive for a FTSE 100 share. But while the dividend rose quarter-on-quarter, overall it is flat. Worse than that is what I expect to come next.
What is the prospective GSK yield?
Right now a lot of GSK investors’ attention is not focused on the past yield but the future one. The company plans to break into two parts – a pharmaceuticals business and a new consumer goods one. It has previously indicated that this could mean a lower total dividend in future compared to now.
In today’s results, GSK provided some perspective on this. The company has said that it expects to pay 45p per share in dividends next year for the residual pharmaceuticals business. On top of that, shareholders will have an interest in the consumer goods business. The dividend for that will depend on the new company’s management, but in its guidance today, GSK suggested that it would likely amount to around 7p per current share.
That means that if I buy a GSK share today, next year the dividends I receive after the split will probably be around 52p. That is a 35% decline from the current dividend, even after it has been held flat for many years. At a stroke, the prospective GSK yield falls to 3.2% from its current level of 4.9%.
My next move
GSK remains an industry giant and its full-year results did contain some positive signs. Revenues rose 5% excluding the impact of exchange rates. Full-year free cash flow of £4.4bn underlines the company’s ongoing ability to generate substantial amounts of cash. That is important when funding a dividend.
But after years of holding the dividend flat – albeit with an attractive yield lately – the company’s upcoming split is likely to lead to a sizeable fall in the GSK yield. If the dividend does fall as expected, I would not be surprised to see the combined share price of GSK and the new consumer goods business fall, as well.
For that reason, I see the current GSK yield as a possible value trap for me. With the dividend level clearly under threat, I will not be adding the firm to my portfolio.
