This week saw full-year results from two FTSE 100 dividend champions – GlaxoSmithKline (LON: GSK) and Rio Tinto (LON: RIO). Here’s a closer look at the results and the dividend declared by each company.
Glaxo’s full-year results were described by CEO Emma Walmsley as “encouraging.” Revenue increased 8% (3% in constant currency terms) to £30.2bn, narrowly beating consensus estimates. Sales grew across all three divisions, with Vaccines performing the best. Adjusted earnings per share increased 11% to 111.7p.
Looking ahead, the company said that profitability this year will largely depend on generic competition to its asthma drug Advair. If there’s no competition, earnings should rise 4%-7%. However, if a generic product is introduced mid-year, earnings could fall up to 3%.
GlaxoSmithKline held its dividend steady at 80p per share. That’s now the fourth consecutive payment of 80p per share. That’s clearly not ideal for income investors who depend on dividends for income. With inflation rising, the purchasing power of Glaxo’s dividend is diminishing. Will we see any dividend growth going forward?
The company noted that it recognises the importance of the dividend to shareholders and that investors should expect a further payout of 80p per share this year. However, we were also advised that the payout won’t be lifted until free cash flow reaches 1.25-1.50 times the dividend. Last year, the ratio was just 0.87. So it may be some time before we see the payout increased.
There’s also concern that a potential acquisition could strain GlaxoSmithKline’s ability to pay its dividend in the short term. That’s something to keep in mind.
The stock looks cheap right now, on a trailing P/E of 11.5, and the yield is high at 6.2%. Those metrics stand out as attractive, but investors should be aware of the risks here.
Rio Tinto’s results were much more impressive. Thanks to higher commodity prices, consolidated sales revenue jumped 12%, with underlying EBITDA rising 38%. Earnings per share came in at $4.83, a 70% increase on last year.
With the price of iron ore having rebounded strongly from its 2015/2016 lows, Rio Tinto is swimming in cash again. Free cash flow rose 64% for the year to $9.5bn.
That’s great news for income investors. With this strong cash flow, the miner was able to pay down a pile of debt, and lift its dividend by an impressive 70% to $2.90 per share. It has also commenced a $1bn share buyback programme.
CEO J-S Jacques commented: “Our strong balance sheet, world-class assets and disciplined allocation of capital puts us in the unique position of being able to invest in high-value growth through the cycle, and consistently deliver superior cash returns to shareholders.”
Source: Data from riotinto.com. Chart compiled by Dividend Wealth
Rio’s dividend payout of $2.90 per share equates to an attractive trailing yield of 5.5% right now. However, if you’re considering buying the stock for its dividend, be aware that mining companies’ profits can be volatile. That means dividend payments can be volatile, too. Last year, Rio Tinto and BHP both cut their dividends. So RIO’s high yield is certainly not guaranteed going forward.
Disclosure: Edward Sheldon, CFA owns shares in GlaxoSmithKline.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.