GSK Stock: GlaxoSmithKline PLC Is a High-Dividend Stock
November 12, 2016
Earn 5% From This High-Dividend Stock
One sector that is known for large gross margins is the healthcare sector. Typically, high-gross-margin businesses are not looked at by dividend investors, the reason being that there is often no dividend. However, GlaxoSmithKline PLC (ADR) (NYSE:GSK) is an exception, being company that has large gross margins and is a high-dividend stock.
GlaxoSmithKline (GSK) is a global company that is based in the U.K. with a presence in more than a 150 counties. The focus for the company is the research, development, and marketing of pharmaceutical products. Some of the products that are produced include vaccines, pharmaceutical products, and everyday healthcare products like toothpaste.
With the diversified nature of its business, GSK has many streams of cash flow. The company is shareholder-friendly, which has made it a high-dividend stock. The current trading price of GSK stock is $39.25 and it is yielding 5.09%.
Strong Management
GSK’s high dividend is supported by large gross margins. For the third quarter of 2016, gross margins came in at 66.5%. Gross margins represent the percentage of revenue that is retained after factoring in the cost of goods sold. In the case of GSK, $0.665 is retained from each dollar of revenue earned. A major factor for large gross margins is GSK being a global company.
Due to the diversified nature of the business, if one of the segments is underperforming, there is always one of the other divisions to offset the slower growth numbers. When looking at the latest quarterly earnings, the evidence is in the numbers.
Sales in the third quarter came in at eight percent, compared to the same quarter in the previous year. All the divisions saw growth, only the Vaccine division’s growth was extraordinary, seeing 20% growth. Meanwhile, the Consumer Healthcare and Pharmaceuticals segments saw five percent and six percent growth, respectively. (Source: “Third quarter 2016,” GlaxoSmithKline PLC, October 26, 2016.)
GSK, being a global company, has another stream of income other than operating the business strategy: the foreign exchange markets. Since the company is based out of the U.K. and operates worldwide, transactions are done in many different currencies.
When there is a surplus of cash in a currency other than the U.K.’s pound sterling, an opportunity arises to convert it for capital gain. When the time is not favorable for a capital gain, then the cash can be placed into a savings account to earn some interest. Across many countries, the interest rates are sitting at historic lows and there are no benefits to putting money into savings accounts.
But for global companies, it’s a different story. In the U.S., for example, interest rates are sitting at historic lows of 0.25% to 0.50%. On the other end of the spectrum, India has interest rates of five percent to 7.25% on savings accounts. India would be a great example of putting money into a savings account until the currency favors GSK. With so many different options for the company to drive up the bottom line, GSK can remain a high-dividend stock.
Final Thoughts on GSK Stock
High-dividend stock investors’ no. 1 fear is their dividend being cut. The top reason why companies do so is that earnings are not strong enough for such a payout. GSK stock is not one that has any fear of slowing earnings going forward, given GlaxoSmithKline’s global presence and new pharmaceutical products expected to hit shelves in 2017.
