If You Want Dividend Income, Look No Further than GlaxoSmithKline plc Stock

GlaxoSmithKline's focus on these two therapeutic areas could be the impetus that pushes its payout higher and puts ample dividend income in shareholders' pockets.

Aug 20, 2014 at 8:44AM

Dividends: They're the cornerstone to any healthy, long-term-focused portfolio. But when it comes to the health care industry, securing dividend income isn't as easy as it sounds.

Finding a great dividend involves locating businesses that strike a good balance of growth, value, and sustainability. One such health care company that would appear to fit that bill well, and which could provide valuable dividend income to young and retired investors alike, is pharmaceutical GlaxoSmithKline (NYSE:GSK).

Source: GlaxoSmithKline, Flickr

Big pharma has numerous woes
As with most big pharmas, GlaxoSmithKline isn't without its own unique set of risks. The patent cliff on key drugs continues to weigh on Glaxo and its peers as new generic drugs come streaming into the marketplace, pushing innovator drugs out the front door from whence they came.


Source: Steven Depolo, Flickr

Specifically, GlaxoSmithKline could face a world of problems in a few years when biosimilar competition for long-term asthma therapy Seretide (perhaps known better as Advair) hits pharmacy shelves. Though Seretide actually came off patent in 2011, no guidance was issued by the Food and Drug Administration as to what it'd be looking for in a biosimilar version to replace the innovating drug. Finally, last fall, the FDA stepped up and issued biosimilar guidelines, essentially starting the sands of time against the drug that brought in $1.83 billion of its $9.3 billion in total revenue in the second quarter -- and that includes a 12% decline in year-over-year sales in anticipation of this eventual biosimilar switch. 

Glaxo's also been dealing with ongoing concerns related to allegations in China and other countries around the world that it bribed physicians in order to boost its own sales. While investigations remain ongoing, the possibility of a monetary penalty and reduced sales in lieu of the negative PR being created by this investigation could hurt its bottom line. 

But Glaxo's ready to tackle them!
Though both of these headwinds are of clear concern for shareholders, the positives would appear to handily outweigh the negatives and give dividend income-seeking investors reason to believe Glaxo will remain a sort of ATM for investors for years to come.

Perhaps the most attractive aspect of Glaxo is its focus on a rapidly growing therapeutic area of interest: respiratory.

JPMorgan Healthcare Conference presentation. Source: GlaxoSmithKline

As evidenced by Seretide, Glaxo has long been a leader in respiratory therapies. The good news is it looks as if the company will remain the leader, even if it sees continued deterioration in annual Seretide sales. The reason is its beneficial partnership with Theravance that allowed the two companies to put their research together and develop a series of LAMA/LABA long-acting drugs targeted at improving chronic obstructive pulmonary disease patients' quality of life. To date, two of these inhaled therapies have been approved: Breo Ellipta and Anoro Ellipta.

Though sales of both compounds have been a bit sluggish since their inception, a lot of that has to do with gaining pricing approval in Europe, securing insurance coverage in the U.S., and expanding the label indications for these two compounds within the U.S. Both COPD therapies, however, still possess peak annual sales potential of north of $1 billion. And that could be just the beginning, with Glaxo and Theravance collaborating on a handful of other respiratory compounds which we should be learning more about in the coming quarters.

As Glaxo's CEO noted in its Q2 press release,

Our strategy to transition and diversify our respiratory portfolio is under way.... We expect new products such as Breo, Anoro and Incruse, together with anticipated pipeline products, to generate new sales growth. We... remain confident that GSK will maintain its leadership position in respiratory well into the next decade. 


Late-stage pipeline presentation. Source: GlaxoSmithKline

But it's not just respiratory. Glaxo has the potential to see big gains in overseas markets as well despite its recent PR flubs. The company's presence in China, India, and a number of other rapidly growing emerging markets gives it the ability to generate growth when industrialized nations like the U.S. and Europe are saturated. Plus, the foundation of medical access in many emerging market countries is still being established, so Glaxo has really just touched the tip of the iceberg when it comes to its overseas sales potential.   

Say hello to dividend income!
The advantage of Glaxo's dynamic and diversified pipeline of branded drugs is that it produces incredibly high margins. In Q2, for instance, the company's gross profit margin was 69% before accounting for other expense factors such as research and development and selling, general and administration costs. For investors this means only one thing: healthy dividend income!

Though GlaxoSmithKline doesn't guarantee a higher dividend to investors year after year, it has consistently paid out a good percentage of its earnings in the form of a dividend and the overall payout trend has modestly inched higher.

Following its recent swoon Glaxo is dangling a roughly 5% yield in front of shareholders' faces and tempting them to jump on board. While I can't guarantee Glaxo's stock will head higher (nobody can), I can say with some certainty that there are enough growth catalysts and legacy products in Glaxo's pipeline for investors who want dividend income to consider digging more thoroughly into the story and growth drivers behind GlaxoSmithKline.

Want more high-yield dividend ideas? You're in luck! Here are a handful of other high-yield stocks currently on our analysts' radar!
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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