Part 2: Three Dividend Stocks You Must Buy – GlaxoSmithKline plc (GSK), The Coca-Cola Company (KO)

Despite the uncertainties of Fiscal Cliff, dividend stocks have emerged as a rock solid investment. Given how tough it is to get income from other alternatives, dividend stocks are likely to remain an essential part of the portfolio of those income hungry investors who live off their investments. With alternative income producing options offering low interest rates and banks offering meager returns on saving accounts, investors have had a little choice other than scouring for dividend paying stocks. In continuation to my last post, I explored the investing landscape a bit more to identify three more dividend stocks which can be a great addition to any investor’s portfolio. Let’s discuss each of these stocks in detail.

Companies 5 year average yield Forward annual yield Payout Ratio
GlaxoSmithKline plc (NYSE:GSK) 4.80% 5.10% 78.0%
Gannett Co., Inc. (NYSE:GCI) 5.70% 4.30% 37.0%
The Coca-Cola Company (NYSE:KO) 2.80% 2.70% 52.0%

Source: Yahoo Finance

GlaxoSmithKline plc (ADR) (NYSE:GSK)

GlaxoSmithKline

The company’s stock price has again gained momentum after hitting a low of ~$41 in November post its third quarter results. The overall performance of the company was impacted by a weak market in Europe. In 2012, the company witnessed price cuts in Europe that squeezed its gross margins. However, I expect this burden to have less effect in the fourth quarter results as the company has now stabilized its operations in Europe by cutting its costs. It included major headcount reductions in EU management, divesting its EU headquarters operations, and combining the EU and emerging markets management teams. Moreover, Glaxo has concentrated its focus on Europe in its R&D mix and is emphasizing more on Japan, China, and Brazil. These corrective measures should help Glaxo in posting steady returns in 2013.

Another positive for Glaxo is its well-placed position in therapeutic cancer vaccines. The company is running trials for MAGE-A3 for metastatic melanoma and non-small cell lung cancer. Looking at the company’s strong record of very less number of errors in clinical trials, I feel this is a good chance for Glaxo to make a breakthrough. The phase II trials have already shown good results and the same statistical significance is expected from phase III results, to be released by mid of 2013. I expect ~10% upside to the company’s value on the release of positive data. The company could be a strong beneficiary in this area, as this a high risk-reward opportunity.

Gannett

Gannett is a consistent dividend payer in Buffett’s portfolio with an average of ~5.7% dividend yield in the last five years. Also the shareholders have all the reasons to celebrate with the company’s stock price mounting upwards with a solid return of ~40% in the last six months. It is currently trading at ~$20, which is its highest level in the last two years. Gannett has been successful in adapting to the changing needs of media by adding new revenue generating channels. A further upside is expected in its stock price considering its subscription revenue growth in 2013. Additionally, the company’s content subscription model has been launched in 78 markets and is expecting the revenue to increase by ~25%. This in turn would generate ~$100 million of operating profit in 2013. I further expect the Gannett’s digital subscribers to grow by 5-7x in 2013.

Apart from this, the company’s cash flow is at ~14% of its sales which is highest among its peers. And, I expect it to generate ~700 million of FCF in 2013. The funds could be used in buying out assets of CareerBuilder which the Tribune Co has announced after coming out of bankruptcy. Gannett already has ~53% stake in this company and it would be the first choice for further investment. I feel this move would help the company to add another stream of revenue along with reducing its dependence on newspapers.

The Coca-Cola Company

The Coca-Cola Company has the highest share in Warren’s Portfolio with a ~20% holding. With lots of ups and downs, the company’s stock has given a return of just ~4% in 2012. This was majorly due to a tough macro environment because of the rising health issues for the beverages companies. Coca-Cola generates ~45% of its sales from North America; therefore it is more likely to get affected by the disappointing volume trends of this region. As per the recent data about the US CSDs (carbonated soft drinks), the overall sales decreased by ~1.1% for the quad week ending 22 Dec ’12. And, Coca-Cola brands witnessed a volume decline of ~2.9% for the same period which offsets the benefit of the price increase of ~1.6%. This led to an overall decline of 50 bps in the company’s market share. I feel the main reason behind this decline is the increasing health and wellness awareness among the customers. This remains a major headwind for such companies which are facing intensified pressure from various health groups thus affecting their sales volumes.

Considering this difficult environment in North America, Coca-Cola is venturing into other markets aiming at boosting its market presence. The company has announced its decision to invest ~$1.3 billion till 2016 to enhance its share in the South American region. As part of this initiative, Coca-Cola has joined hands with its regional bottler Coca-Cola Andina and has invested ~$200 million in a bottling plant in Renca. I feel this to be a good move by the company as Chile has the highest per capita consumption of CSD in South America. And, with this focus, I expect its market share to further enhance pushing out its competitors. This would also benefit the company during the major events such as FIFA world cups and Olympics in this region scheduled in the next four years.

Conclusion

To sum it up, I feel both the companies Glaxo and Gannett offer a good investing opportunity considering their history in dividend and also the future growth fundamentals. On the other hand, Coca-Cola is adapting itself towards a tough macro environment and slower demand in the US, which I feel is likely to continue in the future. However, its improved focus on the emerging nations could benefit the company in the long run.

The article Part 2: Three Dividend Stocks You Must Buy originally appeared on Fool.com and is written by Madhu Dube.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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