Expect news on Glaxo’s dividend at tomorrow’s results, but DCC Group just extended its amazing record.
Today's upbeat third-quarter update from the heating oil-to-healthcare conglomerate DCC (LSE:DCC) forecasts growth in operating profits ahead of expectations for the year to March.
While DCC has a low profile for a FTSE 100 stock, investors-in-the-know appreciate a record showing an average return on capital of approximately 19% over 26 years as a public company. Shares opened 5% higher as the update pointed towards another year of dividend growth.
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The latest price of 5,786p gives DCC a market value of £5.5 billion, but analysts at UBS think the stock should be trading at closer to 7,700p after seeing a strong quarterly performance across all the Dublin-based company's four operating divisions.
This included the transport fuels and heating oil business, where the impact of mobility restrictions caused by Covid-19 was less severe than earlier in the financial year.
UBS adds that merger and acquisition activity worth £230 million in the year to date was a strong result given the pandemic. The bank said: “As ever, management remains active from a development perspective and continues to see a strong pipeline of opportunities ahead.”
Could Glaxo dividend go the way of Shell and BT?
The optimism over DCC's unbroken record of dividend growth is in contrast with the uncertainty being felt by many investors at the start of the 2020 earnings season. Having seen heavyweights including Royal Dutch Shell (LSE:RDSB) and BT Group (LSE:BT.A) cut pay-outs in recent months, GlaxoSmithKline's annual 80p a share now looks to be under threat.
The pay-out has been untouched since 2014, but some in the City are questioning how much longer the pharmaceuticals giant can protect the annual award, when it needs to accelerate progress on new blockbuster drugs to underpin its future as a standalone business.
With the consumer healthcare division due to be separated from Glaxo next year, more information on the capital allocation strategy for the two companies is expected this summer.
Some details could emerge alongside tomorrow's annual results, when investors will be looking for a modest decline in earnings per share of between 1% and 4%. Glaxo's performance has been hampered by access to top-selling vaccines such as Shingrix being disrupted by the inability of people to reach healthcare professionals during government lockdowns.
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Glaxo said as recently as October that there would need to be “material change” in the external environment or performance for it to change the 80p a share dividend. It is targeting free cash flow coverage in a range of 1.25-1.50x before returning the dividend to growth.
But the market is increasingly pricing in the prospect that Glaxo will have to rebase the dividend, possibly from next year, in order to prioritise investment. According to Refinitiv, that would represent the first dividend cut since the company was created in 2000.
Credit Suisse told clients last month that it expects to see a more sustainable dividend pay-out, prompting the bank to cut its price target to 1,400p from 1,580p. The shares are currently at near a three-year low of 1,363p, whereas trading in rival AstraZeneca (LSE:AZN) has been more robust.
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