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* Payout fears sparked by profit warning after weak Q2
* GSK seen avoiding cut but dividend may flatline - analysts
* Drugmaker says dividend "remains our priority"
By Ben Hirschler
LONDON, July 29 (Reuters) - GlaxoSmithKline's fatdividend is under strain but Britain's biggest drugmaker islikely to scrape by without cutting payouts as it seeks tocompensate investors during a bumpy reshaping of the company.
Worries about GSK's dividend, which offers a sector-beatingyield of 5.5 percent, have mounted since last week when itwarned on 2014 profits and confirmed plans to sell severalprofitable older drugs.
Industry analysts, however, believe GSK's current dividendis safe for now, although its policy of growing payouts year byyear is in doubt.
GSK's dividend is already equivalent to approximately 80percent of earnings and that figure could climb to about 90percent once it divests older drugs with annual sales of around1 billion pounds ($1.7 billion).
Ditching these so-called established products makeslong-term sense, since their sales are declining, but theyremain extremely profitable, with first-half operating marginsof 58.7 percent against 26.3 percent for the group as a whole.
As a result, the sale will inevitably dilute earnings pershare, tightening dividend cover further. Just how stretchedthings will get is now a key focus for shareholders.
While GSK announced a 6 percent increase in the dividend forthe first half of 2014, consensus forecasts suggest growth willmoderate in the second half, giving a full-year dividend of 80.8pence from 78p in 2013, according to Thomson Reuters data.
GSK has already cut its buyback programme as a result of thedividend becoming more difficult to pay and four separateresearch notes on Tuesday highlighted the looming squeeze.
Berenberg expects the dividend to be held at 80p a sharefrom 2014 through 2017 as GSK tries to get the payout ratio backdown to 70 percent.
Morgan Stanley also predicted a stable dividend, whileBarclays said GSK could still deliver some growth, although "itis possible dividend growth does not match our forecasts".
Liberum analysts were more wary, arguing the dividend wassafe for the coming 18 months but warning that a change instrategy or a worsening outlook could undermine this picture.
Morgan Stanley rates GSK "overweight", while Berenberg andBarclays have it as a "hold" or "equal weight", and Liberumranks it a "sell".
ROOM FOR MANOEUVRE
GSK Chief Executive Andrew Witty and his finance head SimonDingemans have limited room for manoeuvre as they try to steerthe company through a tough period of declining sales oftop-selling lung medicine Advair.
The dividend may be sacrosanct, but the cash it eats up -coupled with GSK's sizeable borrowings of 14.4 billion poundsand the potential for hefty fines related to bribery claims inChina - means funding for investment will be tight.
"The dividend remains our priority, in terms of shareholderdistributions. There's no change to the policy," Dingemans toldinvestors last week.
But he acknowledged the company was "paying a relativelyhigh amount" as it goes through a transition period from heavyreliance on Advair to a hoped-for phase of strengthening demandfor new respiratory drugs.
GSK shares had their biggest one-day drop on July 23 afterthe company cut its 2014 earnings outlook due to sales of itsinhaled lung drugs in the all-important U.S.market.
Witty hopes new drugs Breo and Anoro will pick up the slackleft by Advair, and is also pinning hopes on a complex three-waydeal with Novartis, announced in April, that will seeGSK become more focused by increasing its footprint in consumerhealthcare and vaccines.
He said at the time the deal would "create significant newoptions to increase value for shareholders", sparkingspeculation GSK might consider a break-up as it has littlefinancial headroom to bulk up operations.
But any such moves look distant, since Novartis will notdecide until 2018 at the earliest whether it wants to sell itsstake in the consumer healthcare joint venture. (Editing by Erica Billingham)
