It Might Not Be A Great Idea To Buy GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) For Its Next Dividend

GlaxoSmithKline Pharmaceuticals Limited (NSE:GLAXO) stock is about to trade ex-dividend in three days. Investors can purchase shares before the 17th of July in order to be eligible for this dividend, which will be paid on the 26th of August.

The upcoming dividend for GlaxoSmithKline Pharmaceuticals is ₹40.00 per share, increased from last year's total dividends per share of ₹20.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for GlaxoSmithKline Pharmaceuticals

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, GlaxoSmithKline Pharmaceuticals paid out 364% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Cash is slightly more important than profit from a dividend perspective, but given GlaxoSmithKline Pharmaceuticals's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. GlaxoSmithKline Pharmaceuticals's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 35% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, GlaxoSmithKline Pharmaceuticals has lifted its dividend by approximately 2.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. GlaxoSmithKline Pharmaceuticals is already paying out 364% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

From a dividend perspective, should investors buy or avoid GlaxoSmithKline Pharmaceuticals? Not only are earnings per share declining, but GlaxoSmithKline Pharmaceuticals is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: GlaxoSmithKline Pharmaceuticals has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering GlaxoSmithKline Pharmaceuticals as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 3 warning signs for GlaxoSmithKline Pharmaceuticals that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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