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FTSE100 pharmaceutical giant GSK (LSE:GSK) is a popular stock for dividend income, but the last year has seen payouts cut and big changes to the business.
Here I will discuss the latest dividend forecast for GSK and explain why I now view this stock as a possible buy.
In 2022, GSK spun off its consumer healthcare division into a new company called Haleon. This split means that GSK is now a pure pharmaceutical company, focusing on areas such as cancer, vaccines and respiratory diseases.
I think this smaller, more focused company could be in a good position for stable long-term growth. The recent results certainly seem encouraging to me. Sales from continuing operations rose 13% to £29bn last year, while profits rose 23% to £4.9bn.
The forecasts
City analysts covering GSK have now had time to update and release new broker forecasts for 2023 and 2024.
GSK also provided direct guidance on the dividend it plans to pay out in 2023. Companies don’t always do this, but it’s helpful when they do.
| Forecasts | Divide by share | Dividend yield |
| 2023 | 56.5p | 4.0% |
| 2024 | 59.9p | 4.3% |
These numbers tell me that the stocks offer an expected dividend yield of 4% at the moment. The dividend is expected to increase by around 6% next year, providing shareholders with a useful level of revenue growth.
GSK’s profits are also expected to grow 6-10% a year over the next two years, while debt levels are expected to decline. This makes me think that the current payment should be sustainable.
Strong growth prospects?
New drugs generally enjoy patent protection for 20 years. This makes it almost impossible for rival companies to develop a competing product, supporting higher prices.
However, when a drug’s patent protection ends, competing companies often start producing generic alternatives. These are indeed the same drugs but sold much cheaper. For example, paracetamol is a generic of Panadol.
When generics enter a market, the price of the branded product is usually reduced to keep it competitive. This can lead to lower profits for the original owner of the drug.
As a result, big pharma needs a reliable supply of new products to ensure their profits don’t decline over the long term.
In recent years, GSK’s new product pipeline has been weaker than that of some competitors. I think I’m starting to see signs of improvement, but it’s too early to be sure.
Right now, I would say that’s the main risk for me as a potential investor. I don’t have the medical knowledge to judge whether new products will work – and if they do, whether they will be big sellers.
GSK: a purchase today?
I expect the demand for modern medicines to continue to grow throughout my life. GSK is one of the world’s largest companies in this sector, with a long tradition of innovation.
While I am unsure of the future growth prospects of this business, I believe the current stock price reflects this risk. In my view, GSK seems reasonably priced even in a low growth scenario.
If the performance is better than expected, I think the stock could be worth much more in the future. For this reason, I would be comfortable buying GSK today, if I had a free slot in my portfolio.
