The board of GSK plc (LON:GSK) has announced that it will pay a dividend on the 10th of July, with investors receiving 0.16 per share. This will take the dividend yield to an attractive 4.2%, providing a nice boost to shareholder returns.
Our free stock report includes 4 warning signs investors should be aware of before investing in GSK. Read for free now.
GSK\'s Future Dividend Projections Appear Well Covered By Earnings
We like to see robust dividend yields, but that doesn\'t matter if the payment isn\'t sustainable. Based on the last payment, GSK\'s profits didn\'t cover the dividend, but the company was generating enough cash instead. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don\'t think there is much reason to worry.
Over the next year, EPS is forecast to expand by 20.5%. If the dividend continues along recent trends, we estimate the payout ratio could reach 77%, which is on the higher side, but certainly still feasible.
Check out our latest analysis for GSK
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of 1.00 in 2015 to the most recent total annual payment of 0.61. The dividend has shrunk at around 4.8% a year during that period. A company that decreases its dividend over time generally isn\'t what we are looking for.
The Dividend Has Limited Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Earnings per share has been sinking by 14% over the last five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn\'t be feeling too comfortable.
GSK\'s Dividend Doesn\'t Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments haven\'t been particularly stable and we don\'t see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we\'ve picked out 4 warning signs for GSK that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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