GlaxoSmithKline plc (LON:GSK) stock is about to trade ex-dividend in three days. This means that investors who purchase shares on or after the 13th of August will not receive the dividend, which will be paid on the 8th of October.
GlaxoSmithKline’s next dividend payment will be UK£0.19 per share, and in the last 12 months, the company paid a total of UK£0.80 per share. Looking at the last 12 months of distributions, GlaxoSmithKline has a trailing yield of approximately 5.1% on its current stock price of £15.552. If you buy this business for its dividend, you should have an idea of whether GlaxoSmithKline’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s 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. GlaxoSmithKline is paying out an acceptable 59% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether GlaxoSmithKline generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see GlaxoSmithKline’s earnings per share have risen 19% per annum over the last five years. GlaxoSmithKline has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. GlaxoSmithKline has delivered an average of 2.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because GlaxoSmithKline is keeping back more of its profits to grow the business.
Is GlaxoSmithKline an attractive dividend stock, or better left on the shelf? We like GlaxoSmithKline’s growing earnings per share and the fact that – while its payout ratio is around average – it paid out a lower percentage of its cash flow. There’s a lot to like about GlaxoSmithKline, and we would prioritise taking a closer look at it.
With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 2 warning signs for GlaxoSmithKline that we strongly recommend you have a look at before investing in the company.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.