GlaxoSmithKline plc (LON:GSK) is about to trade ex-dividend in the next 2 days. You can purchase shares before the 8th of August in order to receive the dividend, which the company will pay on the 10th of October.
GlaxoSmithKline's next dividend payment will be UK£0.19 per share. Last year, in total, the company distributed UK£0.80 to shareholders. Looking at the last 12 months of distributions, GlaxoSmithKline has a trailing yield of approximately 4.7% on its current stock price of £16.91. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 89% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 61% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that GlaxoSmithKline's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see GlaxoSmithKline's earnings per share have been shrinking at 4.4% a year over the previous five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. GlaxoSmithKline has delivered 3.6% dividend growth per year on average over the past 10 years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. GlaxoSmithKline is already paying out 89% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
Is GlaxoSmithKline worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least GlaxoSmithKline's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think GlaxoSmithKline is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Curious what other investors think of GlaxoSmithKline? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.