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Why GlaxoSmithKline plc Edged Higher in February

By George Budwell - Mar 6, 2017 at 11:43AM

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Can Glaxo's recent momentum continue?

What happened

According to data from S&P Global Market Intelligence, shares of the British drugmaker GlaxoSmithKline (GSK 2.20%) rose by 7.36% last month. The exact reason for Glaxo's strong February, however, isn't altogether clear.

After all, the market barely reacted to either the company's mixed fourth-quarter results early in the month or its positive top-line data release for the asthma medicine Revlar Ellipta toward the end of the month.

Pills scattered across money.

Image source: Getty Images.

What does appear to have excited investors, on the other hand, is the stock's sky-high dividend yield of around 5%. Glaxo's shares went ex-dividend on Feb. 23, which coincided with the bulk of the stock's monthly surge higher. 

So what

Glaxo sports one of the highest dividend yields in the pharma industry but also the highest payout ratio (1,372%) by a long shot. As the company's near-term growth prospects simply aren't strong enough to make a significant dent in this ginormous payout ratio, Glaxo's exceedingly attractive dividend yield may ultimately prove to be a bad reason to buy this stock. 

Now what

Glaxo is in the midst of a management change, with the head of its consumer health unit Emma Walmsley scheduled to take the reins from departing CEO Andrew Witty on April 1. This managerial shake-up may lead to a heavier emphasis on M&A to bolster the company's anemic pharma pipeline and ramp up its top-line growth moving forward, especially with the company's top-selling asthma medication Advair set to face generic competition in the U.S. soon.

And if Walmsley does decide to make a splash on the M&A scene, the company may have little choice but to slash its top-flight dividend as part of a broader capital reallocation strategy. So, income investors on the hunt for elevated yields may want to pass on this big pharma stock for the time being. 

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