Is GlaxoSmithKline a high-yield dividend star or a dangerous dog of the FTSE 100?

How sustainable is the GlaxoSmithKline plc (LON: GSK) dividend?

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.

You can get decent investing results by collecting dividends from high-yielding stocks and reinvesting them to compound your gains. However, that strategy only works well as long as the stocks you buy and hold have sustainable dividends.

Is the 5%-plus dividend yield for pharmaceutical giant GlaxoSmithKline (LSE: GSK) sustainable? This table summarises the recent financial record:

Year

2013

2014

2015

2016

2017

Net cash from operations (£m)

7,222

5,176

2,569

6,497

6,918

Profit before tax (£m)

6,647

2,968

10,526

1,939

3,525

Adjusted earnings per share

108.4p

95.4p

75.7p

102.4p

111.8p

Dividend per share

78p

80p

80p

80p

80p

Cash flow generally supports profits well. But neither cash flow, earnings or the dividend have moved up over the past four years, suggesting that GlaxoSmithKline is struggling to grow.

Grinding on

Back in April with the first quarter results report, chief executive Emma Walmsley told us that the company made good progress in the first part of the year, with sales growth across all operational businesses. Recent product launches included Shingrix, Trelegy and Juluca, which, along with other new releases, are contributing to improvements in the firm’s adjusted operating margin. 

However, the problem of patent expiry still dogs the firm and sometimes it seems as if two steps back follow every two steps forward, as the recent stagnant dividend attests. The firm saw “increased pricing and competitive pressures” in the US inhaled respiratory market during the first quarter and expects a decline of around 30% in sales of Advair in the US during 2018. Overall, the directors think earnings per share will grow 4-7% this year, suggesting some progress, although probably not enough to get the dividend moving up again.

The company has agreed with Novartis to acquire its Consumer Healthcare business for $13bn, subject to shareholder approval. The directors said the acquisition will “improve future cash generation and support capital planning” with the aim of strengthening the pharmaceuticals business and the research and development (R&D) pipeline. I reckon boosting that R&D pipeline is the firm’s best hope for getting the dividend to expand in the future, so the Novartis move could mark a turning point for GlaxoSmithKline.

GlaxoSmithKline’s dividend sustainability score

Let’s look at three different features to judge whether the company’s dividend seems sustainable with each indicator scored out of a possible five points:

  1. Dividend cover: adjusted earnings covered last year’s dividend almost 1.4 times. 2/5
  2. Cash flow: generally, cash flow covers profits well but has not grown in four years. 4/5
  3. Outlook and trading: recent trading has been good and the outlook is satisfactory. 4/5

Overall, I score GlaxoSmithKline 10 out of 15, which makes me a little cautious about the sustainability of the firm’s dividend, particularly with the ongoing drag from generic competition. The static dividend demonstrates how tough things have been for the firm and I’m not expecting the dividend to rise much over the next year or two. That said, I think GlaxoSmithKline could be a decent stock to hold for very patient investors because of the defensive characteristics of the sector.

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 of the shares 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

At $184, I reckon this S&P 500 juggernaut is still on sale

Our writer sees Amazon (NASDAQ:AMZN) as an attractive S&P 500 stock to consider while it is priced 23% lower than…

Read more »

Investing Articles

Cheap FTSE 250 shares to consider buying right now?

These FTSE 250 growth stocks had weak starts to 2025, and face short-term uncertainty. But their long-term valuations could be…

Read more »

Investing Articles

As stocks dive, is this a rare chance for ISA investors to build generational wealth?

Globally, stocks have pulled back significantly following the announcement of tariffs by the US president. Is this an opportunity for…

Read more »

Investing Articles

2 ultra-cheap shares to consider right now!

These cheap UK shares offer considerable growth and income potential over the long term, reckons our writer Royston Wild.

Read more »

Investing Articles

Legal & General Group shares go ex-dividend on 24 April – time to grab that 9% yield?

Harvey Jones holds Legal & General Group shares and is already looking forward to the next bumper dividend from this…

Read more »

Young female analyst working at her desk in the office
Investing Articles

3 FTSE 100 dividend stocks to consider buying while they’re on sale

Paul Summers reckons canny investors should think about snapping up quality, dividend-paying stocks while they're going cheap

Read more »

Investing Articles

2 cheap passive income shares to consider buying right now

The passive income we can earn from the UK stock market looks set to climb this year, and could even…

Read more »

Investing Articles

Down 15% in a month, this FTSE 100 dividend share offers investors a stunning 10.8% yield

Harvey Jones plucks out a FTSE 100 dividend share that offers frankly a quite staggering yield and is now a…

Read more »