For a while, I’ve wanted to invest in GSK (LSE: GSK) and treat it as an income stock in my portfolio. However, the waters have been muddy, and the business has yet to prove itself to me.
Back in July 2022, the company completed the demerger of its consumer healthcare business, which became Haleon. The move was part of a bigger plan aimed at investing in new vaccines and speciality medicines.
The directors have been determined to reshape, strengthen and advance GSK’s research and development portfolio in the pursuit of growth.
Targeting growth
Around three years ago when becoming aware of the firm’s ambitions, I wondered if GSK could turbocharge its own growth engine and outperform like its peer AstraZeneca has.
Perhaps a vibrant R&D pipeline could develop and be capable of spitting out earnings-enhancing new medicines. After all, AstraZeneca has shown what’s possible.
However, we’re not there yet with GSK. Reinvention doesn’t produce overnight results. It’s unfair to judge the company without giving it at least five years, I’d say. So for me, that means there’s at least a couple of years more to wait before looking for signs of meaningful growth in the business.
Meanwhile, I see the company as potentially offering investors some compensation from the dividend while waiting for growth to unfold. So yesterday’s (31 January) full-year results report is worth exploring for what it says about the firm’s commitment to the shareholder payment.
Steady payments
The news is fairly neutral, I’d say. The company declared a fourth interim dividend of 16p per share, up just over 16% year on year. That takes the full-year payment for 2023 to 58p. However, that figure is down a little from 2022’s.
Looking ahead, the directors anticipate the 2024 dividend will be 60p. Perhaps that move higher will be the beginning of progression in the shareholder payment.
The GSK directors reckon they recognise the importance of income to shareholders. They previously committed to implementing a progressive policy from 2022, guided by a 40-60% pay-out ratio. In other words, net income will be used to pay shareholder dividends within those limits.
There’s some flexibility with a policy like that. But income not allocated to dividends can be reinvested in the business to help drive growth. That’s good because even if I buy shares in GSK for dividend income in the shorter term, I’d be hankering after longer-term capital gains as well.
This latest update is interesting
There are risks for investors here though. For example, the future success of the ongoing R&D effort isn’t guaranteed. Meanwhile, GSK is now minus the ongoing cash-generating healthcare operations that went with Haleon.
If dividend progression starts going backwards, the share price could fall. Then shareholders would lose income and capital.
Nevertheless, GSK looks more interesting to me today than it did before this results report. So I’m focusing more closely on the company now.
With the share price near 1,535p, the forward-looking dividend yield for 2024 is just below 4%. That’s in the ballpark for me to consider the company as a dividend income stock.
