A Curates egg of an update from GSK.

GlaxoSmithKline (GSK) - put out Q1 numbers yesterday lunchtime and set out prospects for newly shaped Group and expectations for improvements in performance for 2016-2020. I say a curates egg because the numbers themselves were a little lack lustre but they had some good and some bad news on the dividend front.

As regular, longer term readers may or may not recall, I have expressed some concerns about the sustainability of their dividend last year when it was still expected to be growing by 4 or 5%. These expectations got downgraded as we went through the year and eventually they ended up just maintaining the full year dividend at 80p after years of growth.

To recap I was concerned that the disposal of the cancer business and the proposed float of the HIV business plus the impending arrival of the new chairman might then prompt them to cut the dividend going forward given the limited cover and their not so strong balance sheet. This was evidenced by their comment in the statement on their decision to retain for now the HIV business as follows:

"Since the completion of the transaction and receipt of the first monthly results from the former Novartis businesses during April, the Group has reviewed in detail its integration plans and has developed a five year outlook for the Group, which includes an updated view of ViiV Healthcare.  In doing so, GSK has also reviewed its capital allocation strategy.  The Group's commitment to its current credit ratings has been a key consideration in this review."

They have however today in this update committed to maintaining the pay out at 80p for the next three years (2015-17).
Against this though they have cut their proposed return of capital from the disposal of the cancer business by 75% from £8bn to £2bn or about 20p rather than about 80p. Not a big deal I guess as this was just paying shareholders back with their own capital, but it seems they now want to hang onto more of it to facilitate the maintenance of the dividend by paying it out more slowly and less explicitly and also maintain their credit rating as highlighted above.

On this they said the following: "The Group wishes to ensure that it maintains the flexibility to deploy capital in response to certain events, which may or may not occur in the next five years, including the potential exercise of 'put' options by partners in ViiV Healthcare and Consumer Healthcare; and the possible introduction of a generic version of Advair in the US.  The Group has also factored into its view the impact of a continued low interest rate environment on pensions, other employee related liabilities and potential company contributions."

So it seems they are also highlighting several other risks to their growth and finaces, so I would still be concerned about the sustainability of the dividend in the medium term, but hopefully they can come through this period and return to growth in the dividend at some point in the future.

Summary & Conclusion
On balance something of a relief for income investors that the dividend is being maintained, but hopes of a bumper special this year have been dashed and slashed by 75% as even that is not now coming until next year. The shares do not look especially cheap on around 17x with a flat yield of just over 5%. It is undoubtedly a high quality business, but given the outlook maybe the rating is a bit rich? So I'm not that surprised to see it off today, albeit in a weak market with a whiff of panic setting in maybe?

 On the Compound Income Scores it is in the bottom quartile with its score of 25 being dragged down by poor dividend cover and finances plus a poor estimate revision trend. Thus it would not feature as part of a focussed income portfolio as there will be more attractive and growing dividends to be had. However, I can see the attraction as part of a more broadly based income portfolio given the reassurance on the dividend for now and the quality of the business.