FTSE 100 pharma giant GSK (LSE: GSK) is a popular stock for dividend income, but last year saw the payout cut and big changes made to the business.
Here, I’ll discuss the latest dividend forecasts for GSK, and explain why I am now viewing this stock as a possible buy.
In 2022, GSK separated its consumer healthcare division into a new business called Haleon. This split means that GSK is now a pure-play pharmaceutical business, with a focus on areas including cancer, vaccines, and respiratory diseases.
I think this smaller and more focused business could be in a good position to deliver steady long-term growth. Recent results certainly seem encouraging to me. Sales from the continuing business rose by 13% to £29bn last year, while profits rose by 23% to £4.9bn.
The forecasts
City analysts covering GSK have now had time to update and publish new broker forecasts for 2023 and 2024.
GSK has also provided direct guidance on the dividend it expects to pay in 2023. Companies don’t always do this, but it’s helpful when they do.
| Forecasts | Dividend per share | Dividend yield |
| 2023 | 56.5p | 4.0% |
| 2024 | 59.9p | 4.3% |
These numbers tell me the shares offer a forecast dividend yield of 4% at the moment. The dividend is expected to rise by about 6% next year, giving shareholders a useful level of income growth.
GSK’s profits are also expected to rise by 6-10% per year over the next couple of years, while debt levels are expected to fall. That makes me think the current payout should be sustainable.
Strong growth prospects?
New medicines generally receive patent protection for 20 years. This makes it near-impossible for rival firms to develop a competing product, supporting higher prices.
However, when a medicine’s patent protection ends, rival firms often start to produce generic alternatives. These are effectively the same medicine but sold much cheaper. For example, paracetamol is a generic of Panadol.
When generics enter a market, the price of the branded product is usually cut so it stays competitive. This can result in falling profits for the medicine’s original owner.
As a result, big pharmaceutical companies need a reliable supply of new products to make sure their profits don’t enter a long-term decline.
In recent years, GSK’s new product pipeline has been weaker than some rivals. I think I’m starting to see signs of improvement, but it’s too soon to be sure.
Right now, I’d say this is the main risk for me as a potential investor. I don’t have the medical knowledge needed to judge whether new products will work — and if they do, whether they’ll be big sellers.
GSK: a buy today?
I expect demand for modern medicines to continue growing throughout my lifetime. GSK is one of the world’s largest companies in this sector, with a long history of innovation.
Although I can’t be sure of the future growth prospects for this business, I think the current share price reflects this risk. In my view, GSK looks reasonably valued, even in a low-growth scenario.
If performance is better than expected, I think the shares could be worth a lot more in the future. For this reason, I’d be comfortable buying GSK today, if I had a free slot in my portfolio.
