GlaxoSmithKline plc (LON:GSK) is about to trade ex-dividend in the next three days. This means that investors who purchase shares on or after the 12th of November will not receive the dividend, which will be paid on the 14th of January.
GlaxoSmithKline's upcoming dividend is UK£0.19 a share, following on from the last 12 months, when the company distributed a total of UK£0.80 per share to shareholders. Calculating the last year's worth of payments shows that GlaxoSmithKline has a trailing yield of 5.7% on the current share price of £13.99. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether GlaxoSmithKline has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for GlaxoSmithKline
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. GlaxoSmithKline paid out 62% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 58% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see GlaxoSmithKline's earnings per share have risen 17% per annum over the last five years. GlaxoSmithKline has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, GlaxoSmithKline has increased its dividend at approximately 2.7% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
To Sum It Up
Is GlaxoSmithKline worth buying for its dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see GlaxoSmithKline's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 62% and 58% respectively. In summary, it's hard to get excited about GlaxoSmithKline from a dividend perspective.
On that note, you'll want to research what risks GlaxoSmithKline is facing. For example, we've found 1 warning sign for GlaxoSmithKline that we recommend you consider before investing in the business.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.
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