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A good hunting ground for dividend stocks is often companies from which Wall Street wants to see strong performance in the short-term, while its long-term prospects are actually what are most bright.

One such case is this pharmaceutical giant, whose management has chosen to prioritize the dividend, despite an uncertain short-term outlook…

The company in question is  GSK PLC (GSK). Their uncertain outlook stems from the ongoing legal saga in the U.S., where tens of thousands of people have filed lawsuits alleging that the heartburn treatment Zantac gave them cancer. The drug had originally been formulated by a GSK predecessor in the late 1970s.

In June 2023, the stock received a boost when the company revealed it had reached an undisclosed settlement with a California resident who claimed to have developed bladder cancer after using Zantac.

However, the lack of share price response to a very good set of half-year results that same month suggests the uncertainty continues to weigh on the shares.

I suspect the June settlement will set a precedent for the company to settle other cases out of court. This will allow GSK to invest in its drug pipeline. Ultimately, GSK’s longer-term growth trajectory—and dividend payouts—will be determined by its ability to develop new pharmaceutical products and bring them to market.

GSK’s Pharma Pipeline

Some key drugs in GSK’s lucrative portfolio of HIV treatments will go off-patent before the end of the decade. This means the company is under pressure to build new revenue streams from its drug pipeline. That was one reason it demerged its lower-margin consumer health business Haleon (HLN) last year. GSK’s intent was to focus more of its resources in the areas of respiratory and infectious diseases, oncology, and immuno-inflammation.

Whether this split into two companies will be a success depends on GSK’s ability to build its pipeline and bolster growth prospects in the coming years. Its latest results have already shown improvement, leading management to raise its 2023 sales growth guidance to 8% to 10% at constant exchange rates, from 6% to 8% (excluding COVID-19 solutions). It would not be a surprise if it topped even the raised estimate.

GSK’s second-quarter sales grew 4% year-on-year (+10% excluding COVID-19 solution sales) on strong growth of its HIV medicines as well as its shingles vaccine, Shingrix. And there is more good news with regard to Shingrix…

On October 9, GSK signed a deal with Zhifei, China’s largest vaccine company by revenue, which agreed to buy about $3 billion worth of Shingrix—which is targeted at older adults—over the course of three years. This partnership “materially expands” the number of Chinese adults who would benefit from Shingrix: by 2030, there will be about 570 million adults over the age of 50 in China, but as of June 2023, only around 1.2% had been vaccinated against shingles.

GSK’s ultimate goal is to double global sales of its shingles vaccine by 2026.

Putting Its Money to Use

The Haleon spin-off did give GSK a roughly $8.5 billion payout that it already has put to use. It agreed to a $2 billion deal for the late-stage Canadian biotech business Bellus Health in April.

The acquisition provides GSK access to camlipixant, a potential best-in-class and highly selective P2X3 antagonist currently in phase III development for the first-line treatment of adult patients with refractory chronic cough (RCC).

It is estimated that 28 million patients—six million in the U.S. alone—suffer from chronic cough. RCC is defined as a persistent cough that lasts for more than eight weeks and does not respond to treatment for an underlying condition or is otherwise unexplained.

On July 31, GSK announced that the FDA had approved a different drug, Jemperli in combination with chemotherapy, followed by Jemperli as a single agent, for the treatment of adult patients with primary advanced or recurrent endometrial cancer that is mismatch repair deficient (dMMR) or microsatellite instability-high (MSI-H).

Meanwhile, following approvals in the U.S. and the EU, Great Britain’s Medicines and Healthcare products Regulatory Agency (MHRA) authorized Arexvy, the world’s first respiratory syncytial virus (RSV) vaccine for adults aged 60 years and older.

And, separately, the FDA has granted Fast Track designation for an investigational vaccine against the bacterium causing gonorrhea, while the European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use (CHMP) granted a positive opinion recommending marketing authorization for cabotegravir long-acting (LA) injectable and tablets for HIV prevention.

Along those lines, in September, GSK hosted an analyst presentation on its HIV segment (close to 20% of total sales), signaling increased focus on developing longer-duration therapies. The development of longer-duration treatments should help mitigate the upcoming 2028-29 patent losses on GSK’s key HIV drugs Tivicay, Triumeq, and Dovato (collectively representing close to 15% of total sales), which should reinforce the firm’s wide moat.

GSK’s strategy to extend its every-two-month HIV therapy Cabenuva/Apretude to longer duration should be a winner, given many patients’ preference for less-frequent dosing.

GSK’s Dividend Commitment

So, with acquisitions and research and development spending both increasing, what about GSK’s dividend?

The company’s income credentials come from what its management described as an “aggressive” dividend policy. At its results conference call in June, the company’s CFO, Julie Brown, reasserted that management is committed to maintaining a 40% to 60% payout ratio as earnings increase over time.

Of course, there is no guarantee of profit growth, but there is no denying GSK’s comparatively generous dividend. Income investors will really notice this in 2024 as growth kicks in.

In the meantime, a dividend yield of around 4% (3.87%)—and, given the company trades on a price/earnings ratio of just 10, an earnings yield of 10%—looks pretty good.

GSK stock is a buy under $38 a share.

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