Today I am looking at why stratospheric dividend growth at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) could come to an end.
Tremendous yields on the table
Even though colossal patent losses across key drugs have hampered the bottom line in recent times, GlaxoSmithKline has managed to keep dividends ticking relentlessly higher. Indeed, the pharma play has lifted the full-year payout at a compound annual growth rate of 6.3% dating back to 2009.
But GlaxoSmithKline advised in last weeks interims that it expects the full-year dividend to come in at 80p per share for 2014, up 3% year-on-year. And this is anticipated to remain static during the following 12-month period.
Still, these projections are hard to ignore given the size of the yield on offer a figure of 5.7% trashes the FTSE 100 prospective average of 3.4%, not to mention a corresponding reading of 2.6% for the complete pharmaceuticals and biotechnology sector.
but dividend deceleration highlights sales woes
GlaxoSmithKline cheered the market last week when it announced pre-tax profit of 548m for July-September, trumping broker estimates. But this still represented a huge drop from the 1.4bn profit booked during the corresponding 2013 period, as patent expiration for the likes of its Advair respiratory brand smashed turnover group revenues excluding divestments slipped 10% in the third quarter, to 5.6bn.
Given this wobbly backcloth, GlaxoSmithKline is anticipated to record a 17% earnings drop in the current 12-month period, with a slight 4% bounceback anticipated for 2015.
Although the company last week affirmed its confidence that its bubbly R&D pipeline can deliver solid earnings growth during the next decade, any hiccups during the development process for any its new wave of products could prove a serious setback.
On top of this, a crumbling top line is also weighing heavily on the drugs giants balance sheet, a worrying precursor for dividend payments. Free cash flow registered at 1.3bn during July-September, a gigantic drop from 3.2 billion from the same 2013 quarter as adverse currency movements and working capital movements also weighed.
Without doubt GlaxoSmithKlines bumper dividend yields for this year and next could be considered too good to pass up. And for the long-term the firms excellent product pipeline, combined with the recent resolution of the Chinese corruption saga, in theory bodes well for future earnings expansion.
But should work at the firms capital-sapping R&D department disappoint, shareholders could see dividend growth continue to slow considerably in coming years.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.