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GSK shares were trading down at 1418 this morning following an earnings call that was not well received by investors.

The drugs firm is being criticised after it failed to confirm whether or not it would be maintaining its dividend. Investors have liked GSK shares because of their reputation for paying a big cash dividend, but following the earnings call yesterday morning, GSK shares fell 1525.50 where it had been holding relatively steady.

Dividend to cash flow

Analysts and investors already recognise that GSK shares pay a big dividend relative to cash flow when compared with competitors like Johnson & Johnson or Pfizer. Investors would like to see GSK do some more work realising cash, or they will vote with their feet. There has been fighting talk of further acquisitions at GSK, like a put option that Novartis has on a $10 billion joint venture with GSK. It has also said it is looking at a $17 billion consumer unit owned by Pfizer.

GSK has the debt capacity to fund these acquisitions, but it would be a squeak, and if the GSK share price is any indicator, many investors would prefer that it did not. Perhaps it might be better off focusing its attention on its pharmaceuticals division, which has been struggling in Q3, as GSK seeks to make an impact with drugs like Breo?

GSK shares vs Pfizer for dividends

Which brings us to Pfizer. The pharmaceuticals sector has some very large and cash rich companies – we have mentioned Johnson & Johnson already. Pfizer is apparently considering the auctioning of its $15 billion consumer healthcare business, which sells such products as headache pills and lip balm. It had sales of $3.4 billion in 2016 and GSK is known to be interested in the division. It is not exactly known which other pharmaceutical companies are planning to bid, but Johnson & Johnson is one name that has been mooted, and as we said previously, they have a lot of cash sloshing around in their business.

So if you are holding GSK shares because of the dividend, it may be time to go shopping elsewhere within this sector. GSK’s CEO Elizabeth Walmsley is obviously keen to make an impression having taken over in April. GSK shares hit a one year high at 1722 in July, but now they are well on course towards a five year low and eventually a possible value play. Pfizer pays out a dividend of $0.32 per share on 1 December.

Interested in dividend yielding stocks? Talk to our team of journalists and other traders on our forums.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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