One dividend growth stock I’d buy alongside the GSK share price
GlaxoSmithKline(LSE: GSK) has some of the best dividend credentials in the FTSE 100. As a healthcare company, its income stream is reasonably predictable, and it’s defensive. No matter what happens to the global economy, there’ll always be a demand for medicines, vaccines and consumer healthcare products as humans don’t stop getting sick in a recession.
On top of these attractive qualities, shares in the company currently support a dividend yield of 5.3%, which is around 0.5% above the FTSE 100 average.
There’s also one other reason why I reckon this company is expected to produce significant returns for investors in the years ahead.
Investor windfall
At the end of December, Glaxo shocked the market by announcing it was merging its consumer healthcare arm with US drugs giant Pfizer. The combined business will become a mega-giant in the consumer healthcare market, with annual sales of £9.8bn.
It was only at the beginning of 2018 that Glaxo announced it would be activating the option to acquire the rest of its consumer healthcare joint venture with Swiss peer Novartis, formed a few years ago. The scale acquired through this initial transaction allowed Glaxo to grab the lion’s share of the new joint venture. The company will have 68% of the new business.
Even better news for investors is that Glaxo and Pfizer have decided the new business will be spun off and listed separately in London within three years. This could provide a massive windfall for investors. For years, Glaxo break-up rumours have been circulating because analysts believe splitting the company up will create more value for investors. Star fund manager Neil Woodford has been one of the most vocal critics of the group’s conglomerate structure and once did a sum-of-the-parts valuation, claiming a potential market value of £100bn (over 2,000p a share) in the event of a breakup.
Only time will tell if this is accurate, but I believe Woodford is in the right ballpark. And investors will be paid to wait for the divorce.
Over the next three years, I calculate the company will distribute 240p per share in dividends (80p per quarter). Added on to the potential 2,000p sum-of-the-parts estimate, and investors could be looking at an upside of 48% from the current level.
Magic income
If you already own Glaxo, another dividend stock I’d buy alongside is Bloomsbury Publishing(LSE: BMY).
Publisher of the Harry Potter books, this company isn’t just a one-trick pony. It’s been expanding its presence in the academic and professional markets, which provide a steady income away from more traditional publishing income streams. This strategy is expected to pay off handsomely, with City analysts forecasting earnings per share growth of 19% for fiscal 2019, and 14% for fiscal 2020.
These estimates put the stock on a forward P/E of just 12.2 for fiscal 2020, a multiple that I think undervalues the company, especially when we factor in its double-digit earnings growth.
On top of this attractive valuation, investors can also look forward to a dividend yield of 4%. With the payout covered 1.8 times by earnings per share, the distribution seems sustainable, with room for growth. As a bonus, the company has a net cash balance of £17m, enough to sustain the diffident for roughly three years, if profits evaporated overnight.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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