Why GlaxoSmithKline plc Edged Higher in February

By George Budwell Markets Fool.com

What happened

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According to data fromS&P Global Market Intelligence, shares of the British drugmaker GlaxoSmithKline (NYSE: GSK) rose by 7.36% last month. The exact reason for Glaxo's strong February, however, isn't altogether clear.

After all, the market barely reacted to either the company's mixed fourth-quarter results early in the month or its positive top-line data release for the asthma medicine Revlar Ellipta toward the end of the month.

Image source: Getty Images.

What does appear to have excited investors, on the other hand, is the stock's sky-high dividend yield of around 5%. Glaxo's shares went ex-dividend on Feb. 23, which coincided with the bulk of the stock's monthly surge higher.

So what

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Glaxo sports one of the highest dividend yields in the pharma industry but also the highest payout ratio (1,372%) by a long shot. As the company's near-term growth prospects simply aren't strong enough to make a significant dent in this ginormous payout ratio, Glaxo's exceedingly attractive dividend yield may ultimately prove to be a bad reason to buy this stock.

Now what

Glaxo is in the midst of a management change, with the head of its consumer health unit Emma Walmsley scheduled to take the reins from departing CEO Andrew Witty on April 1. This managerial shake-up may lead to a heavier emphasis on M&A to bolster the company's anemic pharma pipeline and ramp up its top-line growth moving forward, especially with the company's top-selling asthma medication Advair set to face generic competition in the U.S. soon.

And if Walmsley does decide to make a splash on the M&A scene, the company may have little choice but to slash its top-flight dividend as part of a broader capital reallocation strategy. So, income investors on the hunt for elevated yields may want to pass on this big pharma stock for the time being.

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George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.