Don't Race Out To Buy Pfizer Inc. (NYSE:PFE) Just Because It's Going Ex-Dividend
Pfizer Inc. (NYSE:PFE) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 6th of May will not receive the dividend, which will be paid on the 4th of June.
Pfizer's next dividend payment will be US$0.39 per share, and in the last 12 months, the company paid a total of US$1.56 per share. Based on the last year's worth of payments, Pfizer stock has a trailing yield of around 4.0% on the current share price of $38.65. If you buy this business for its dividend, you should have an idea of whether Pfizer's dividend is reliable and sustainable. As a result, readers should always check whether Pfizer has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for Pfizer
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Pfizer distributed an unsustainably high 121% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Pfizer generated enough free cash flow to afford its dividend. Over the last year it paid out 73% of its free cash flow as dividends, within the usual range for most companies.
It's good to see that while Pfizer's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Pfizer earnings per share are up 2.3% per annum over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Pfizer has delivered 8.0% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Has Pfizer got what it takes to maintain its dividend payments? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Pfizer.
With that in mind though, if the poor dividend characteristics of Pfizer don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 4 warning signs for Pfizer that we recommend you consider before investing in the business.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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