Is the GlaxoSmithKline dividend sustainable?

GlaxoSmithKline at 1370p. This company is undergoing considerable change in its strategic objectives. It looks attractive on both market consensus dividend estimates and on trading range grounds.

Returning to the subject of Glaxo SmithKline (GSK), I see that the share price is at 1370p. I point out that is very close to the basement level of a year long trading range. Its current annual historic dividend yield is now 5.9%. The chart shows a classical double top formation around the turn of the year, after which the share price plunged. Over a year the share price has fallen almost 14% whilst the FTSE 100 Index has fallen less than 1%. The share price seems to be towards the bottom of a year’s trading range of between 1640p to 1350p.

Interestingly, the share price appears to have staged a small, tentative, little bounce from that point. Over the last week, for the first time in a long time, the GSK share price has actually outperformed the Index – by a modest 0.4%. It’s not enough to constitute a “Federal case” but it is there for our consideration, if not with great conviction or magnitude; the share price has come up from 1350p in the last few weeks to 1370p.

The principal argument for the share at around this price is the historic annual dividend yield at just under 6%. If that is to be a support for the GlaxoSmithKline share price at this level, it has got to look sustainable.  The record shows that GSK management has raised the annual dividend payout each year since 2010. The average annual compound rate of growth in its annual dividend is reported as 5.57% over five years.

Last year to 31 December 2014 the published report and accounts showed that operating cash flow fell from £7,222 million to £5,176 million. That was related to the fall in net income that year which fell from £5,628 million in 2013 to £2,831 million in 2014. It is important because the annual dividend alone cost £3,843 million; or nearly three quarters of last year’s operating cash flow. Finance costs altogether were reported as £5,385 million. There was also a cost £1,751 million of capital spending.

Last year then, cash held in reserve at the end of the year had fallen by slightly more that £1.2 billion to just over £4 billion. Set in the context of these numbers it looks as though the management will have to generate more cash inflow or cut some of the cash outflow.

So far as the cash inflow is concerned, net profits are an obvious area where the equation can be improved. The consensus of market estimates show that there should be an improvement here at the pre tax level of profitability. Profit before tax is shown as being £2,986 million for last year but is estimated to improve to £5,345 million this year. This coincides with an estimated increase in operating margins from 15.6% last year to 22.0% this year. At the same time, earnings per share, according to the market consensus estimate, are forecast to fall by 16% to 80p.

All of this begs the question of how it is that pre tax profits this year will rise whilst earnings per share decline? It is a question that I shall not attempt to look into here. I shall be briefly and pragmatically note that whatever the explanation, the same market consensus estimates, make that consistent with an estimated forecast increase in the dividend per share from 80p last year to 82p next year, putting the shares on an estimated prospective annual dividend payout of 82.6p giving an annual dividend yield of 6.1%. If that is so, and the consensus of analysts forecasts are correct, it seems that the dividend looks sustainable and that makes these shares attractive.