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FTSE 100 pharmaceutical giant GSK (LSE: GSK) is a popular stock for dividend income, but the payout was cut last year and big changes were made to the business.
Here, I’ll review the latest dividend forecast for GSK and explain why I now see this stock as a possible buy.
In 2022, GSK spun off its consumer healthcare division into a new business called Haleon. This split means that GSK is now a pure play pharmaceutical business, with a focus on areas including cancer, vaccines and respiratory diseases.
I think this smaller, more focused business could be well-positioned to deliver steady growth over the long term. The recent results certainly look encouraging to me. Continuing business sales rose 13% to £29bn last year, while profit rose 23% to £4.9bn.
forecasts
City analysts covering GSK have now had time to update and post new corridor forecasts for 2023 and 2024.
GSK also provided direct guidance on the dividend it expects to pay in 2023. Companies don’t always do this, but it’s helpful when they do.
| Forecasts | dividend per share | dividend yield |
| 2023 | 56.5p | 4.0% |
| 2024 | 59.9p | 4.3% |
These numbers tell me that the stock is offering an expected dividend yield of 4% right now. The dividend is expected to rise to around 6% next year, giving shareholders a useful level of income growth.
GSK’s profits are also expected to grow by 6-10% a year over the next two years, while debt levels are expected to decline. That makes me think that the current payment should be sustainable.
Strong growth prospects?
New drugs generally receive patent protection for 20 years. This makes it nearly impossible for rival firms to develop a competitive product that will bear higher prices.
However, when a drug’s patent protection ends, rival companies often start producing generic alternatives. These are effectively the same medication but are sold much cheaper. For example, paracetamol is a generic of Panadol.
When generics enter a market, the price of the brand name product is usually lowered to keep it competitive. This may result in decreased profits for the original owner of the drug.
As a result, the big pharmaceutical companies need a reliable supply of new products to make sure their profits don’t fall in the long run.
In recent years, GSK’s portfolio of new products has been weaker than that of some rivals. I think I’m starting to see signs of improvement, but it’s too early to be sure.
Right now, I would say that this is the main risk for me as a potential investor. I don’t have the necessary medical knowledge to judge whether new products will work and, if they do, whether they will be big sellers.
GSK: a purchase today?
I hope that the demand for modern medicines will continue to grow throughout my life. GSK is one of the world’s largest companies in this sector, with a long history of innovation.
Although I cannot be sure of the future growth prospects of this business, I believe that the current share price reflects this risk. In my opinion, GSK seems reasonably valued, 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 feel comfortable buying GSK today, if I had a spare spot in my portfolio.
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