The healthcare sector has some of the best dividend payers in the marker. These companies generate massive revenues and cash flows, which allows them to grow the dividends at an impressive rate. Companies in the healthcare sector are some of the safest dividend investments. GlaxoSmithKline (NYSE:GSK) is one of these companies - It operates in three segments: Pharmaceuticals, Vaccines and Consumer Healthcare.
The stock gained about 21% during the last year, showing that it has the ability to record solid capital gains along with an impressive dividend yield of 5.3%. However, in this article, I will be focusing on the dividend part of the total return. I will try to assess the future growth in the dividends and the company's ability to support dividend growth. I will also briefly discuss the future growth prospects that can result in the capital gains over the next few months.
Dividends and Cash Flows
As far as dividends are concerned, GlaxoSmithKline leads the sector with the highest dividend yield of 5.3 percent. Its peers like Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) only offer dividend yields of 3.20% and 2.90%, respectively. At the moment, GSK pays an annual dividend of $3 per share. Over the last year, GlaxoSmithKline has distributed a total of $6 billion in cash dividends. At the same time, the company has repurchased common shares worth $2.5 billion. So, in total, GlaxoSmithKline has returned over $8.5 billion to its shareholders in the last year.
One of the preferred methods of measuring dividend sustainability is payout ratio based on free cash flows. For the last year, GSK's free cash flows stood at $9.18 billion, which brings its payout ratio close to 66% for the last year. Free cash flows have more than doubled over the last twelve months, mainly because of an increase in the operating cash flows - an increase of about $4.6 billion in 2012 caused the operating cash flows to fall, which resulted in a fall in free cash flows. However, the increase in working capital was much smaller during the last year which brought the operating and free cash flows to the normal level.
GlaxoSmithKline increased its debt by almost 5% with an increase of about 12% in the capital expenditures. However, despite the increase in leverage, the company is able to generate impressive cash flows. Despite an increase in the capital budget, the company was able to generate impressive free cash flows. One of the important factors in growing operating cash flows is an increase in the bottom line - the company's bottom line has increased by about $1.5 billion over the last year. There is still a substantial buffer available to the company, and I believe it will continue to grow its dividends.
Future growth and revenues
GlaxoSmithKline generated net income of $8.83 billion over the last year which is up almost 19% compared to the previous year. This uptrend is due to the greater contribution of pharmaceutical segment, which is the largest business segment with 75% of the total company turnover. However the company also enhanced its presence in the vaccines and consumer healthcare product markets as well. GlaxoSmithKline is also focusing on the niche market of HIV and Oncology drugs. Although some of them are in the initial phase of trials and testing which will ensure future growth and increased stability in the pharmaceutical segment.
Protection of the intellectual proprietary is extremely important in the healthcare sector and plays a big role in the future growth. Pharmaceutical portfolio of the company is dominated by the Respiratory drugs, which accounts for about 38% of the total pharmaceutical business. GlaxoSmithKline is also constantly improving this segment and allocated around $6 billion in research and development in the last year, a greater portion of R&D expenditure is devoted to the pharmaceutical division. The company is working on adding new respiratory drugs to the portfolio which should provide a platform to the company to maintain its market leadership in the segment till. At the moment, GSK generates about $11.8 billion from the respiratory segment, which accounts for about 34% of the global respiratory market, which is worth about $35 billion. The company wants to increase its market share with a total of 19 respiratory drugs currently present at different stages in its product pipeline, which can be a significant boost to GlaxoSmithKline's top-line growth over the coming years.
The leading future growth segments in the pharmaceuticals industry are HIV and Oncology segments with a global market of $19 billion and $51 billion, respectively. GlaxoSmithKline has developed two major drugs for oncology which are the first FDA approved combination of oral targeted therapies for cancer treatment. These drugs also have 90% formulary coverage in the U.S. by leading insurance companies such as Aetna (NYSE:AET) and UPMC. Overall, GlaxoSmithKline has strong future prospects with leading drugs related to different therapeutic segments with a total current market size of around $44 billion. The company also had a $7.4 billion consumer business segment which is growing across all categories in every region of the world. However, with the continuous research and development in the pharmaceutical segment, the company is aggressively pursuing to lead the market with continued growth in earnings, showing GlaxoSmithKline has a strong future outlook with diversified portfolio of drugs and consumer goods.
The purpose of the article was to assess the growth in the dividends - after going through the financial statements and the portfolio of the company, I am certain that the growth in dividends will continue. Furthermore, the future growth prospects of the company should support the upward trend in the stock price. I believe GSK can be a solid addition to the dividend growth portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.