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GlaxoSmithKline plc (ADR) (GSK): A Look At Its Dividend History

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LONDON — Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

GlaxoSmithKline plc (ADR) (NYSE:GSK)

I am currently looking at the dividend prospects of GlaxoSmithKline plc (ADR) (NYSE:GSK) and assessing whether the company is an appetising pick for income investors.

How does GlaxoSmithKline’s dividend history stack up?

2009 2010 2011 2012
FY Dividend Per Share 61 pence 65 pence 70 pence 74 pence
DPS Growth 7.00% 6.60% 7.70% 5.70%
Dividend Cover 2x 0.8x 1.6x 1.5x

Source: GlaxoSmithKline company accounts.

GlaxoSmithKline plc (ADR) (NYSE:GSK) has steadily grown the annual dividend during the past four years even in times of severe earnings pressure. The effect of more than 4 billion pounds in legal charges caused earnings per share to collapse by more than half in 2010, effectively destroying dividend cover that year, while EPS dipped modestly last year as groupwide sales edged lower.

The pharma giant has also granted extra dividends in recent years. 2011’s total payout came to 75 pence following the disposal of various over-the-counter products in North America, adding 5 pence to the full-year payout. GlaxoSmithKline plc (ADR) (NYSE:GSK)’s commitment to keep dividends rolling despite falling earnings has kept coverage below the widely regarded safety reading of 2 times prospective earnings.

What are GlaxoSmithKline’s dividends expected to do?

2013 2014
FY Dividend Per Share 78.2 pence 81.9 pence
DPS Growth 5.70% 4.70%
Dividend Cover 1.5x 1.5x
Dividend Yield 4.70% 5.00%

Source: Digital Look.

City forecasters expect dividends to continue to progress in mid-digit territory over the medium term, helped by a modest EPS bounceback. Earnings increases of 2% and 8%, to 116 pence and 125 pence, are expected this year and next. Still, coverage is still expected to remain stable below the 2 times earnings security benchmark.

GlaxoSmithKline plc (ADR) (NYSE:GSK) announced in last month’s interims that total turnover slipped 2% in the first three months of 2013, to 6.5 billion pounds, in turn driving operating profit down by just over a quarter to 1.6 billion pounds. However, I believe that the company is on the cusp of powering sales higher once more.

Its bubbly R&D pipeline has generated six key drugs currently under review in North America and Europe, which if approved will significantly boost revenues in coming years. The firm is also actively building its presence across the globe, and has also created a Global Established Products division comprising 50 drug brands with annual sales of $3 billion or more to maximize returns here.

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