GlaxoSmithKline - into the dividend fog.

GlaxoSmithKline: Chief Executive Sir Andrew Witty is administering some big medicines to his sluggish charge, where their key respiratory franchise is being held back by poor sales of the ageing Advair, as newer products wend their way to approval. Earlier this year the group announced a complicated deal with Novartis that will see various assets swapped and a major consumer healthcare business emerge as a joint venture. Following that deal the group plans to return £4bn to shareholders, (the current market capitalisation is £66.5bn). Now the group has announced that its majority owned ViiV Healthcare, which was formed to develop treatments for AIDs, is ready for an IPO of a minority stake to crystallise a valuation. The group has also announced plans to target around £1bn of cost savings with half achievable by 2016 and the balance within three years.

The full year dividend for 2014 is targeted to be 80p, up 3% on last year’s 78p. Even after the spike in the shares on these results to around 1380p, that is a handsome yield of 5.8%. The ‘but’ is that in 2015 they expect the dividend to be maintained but not increased. That is where the fog descends for income growth investors. By 2016 your GlaxoSmithKline share will have exposure to the Novartis jv, with its own dividend policy and the ViiV Healthcare subsidiary with another dividend policy (which may not be generous). The £4bn return of capital may feel like income but you then have to replace the recurring 5.8% dividend stream on that money. So if you invest £1000 now and receive income of £58, I do not know what all the moving parts will deliver in 2016. In many such upheavals the answer is less dividend not more. All the corporate moves may well release value for shareholders and for that reason holding onto GlaxoSmithKline shares seems sensible enough. However, by the important yardstick of dividend income growth, they are quite likely to come up short.  (Neil Cumming, 23rd October)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

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