Pfizer's Inc. (NYSE:PFE) Dividend is Depending on Vaccine Booster Shots

This article originally appeared on Simply Wall St News.

 

Unquestionably, Pfizer(NYSE:PFE) received a lot of attention in recent time, as the profits are flying on the tailwinds of a successful COVID-19 vaccine.

On top of that, the company has an excellent dividend track record, raising the dividend for 11 consecutive years.

The current yield at 3.80% still outperforms the industry, but it mandates further examination as the ex-dividend date is just around the corner.

Dividend-paying companies with growing earnings can be advantageous in the long term, as a dividend-reinvesting strategy is deceptively profitable due to compounding returns.

In this case, Pfizer likely looks attractive to investors, given its 3.8% dividend yield and payment history of over ten years. It would not be a surprise to discover that many investors buy it for dividends. There are a few simple ways to assess the risks of buying Pfizer for its dividend, as you can see in the analysis below.

Click the interactive chart for our full dividend analysis

Current Outlook

After the multi-year range between $28 – 40, the stock finally looks ready to break out. Even before the pandemic, the company was pursuing new ventures after the Array Biopharma acquisition that strengthened its position in the Oncology sector. Yet, a successful rollout of the Covid-19 vaccine, followed by the looming threat of the virus and further booster shot needs, might be just what the company needed to move above the multi-year range.

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Pfizer paid out 91% of its profit as dividends. With a payout ratio this high, we'd say earnings do not well cover its dividend. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

Pfizer actually considered cutting the dividend before a strong push from the vaccine boosted the profits.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Pfizer paid out 66% of its free cash flow last year, which is acceptable but is starting to limit the amount of earnings that can be reinvested into the business. While profits did not well cover the dividend, at least they were covered by free cash flow. Even so, if the company were to continue paying out almost all of its profits, we'd be concerned about whether the dividend is sustainable in a downturn.

Remember, you can always get a snapshot of Pfizer's latest financial position by checking our visualisation of its financial health.

Dividend Volatility and Growth Potential

Before buying a stock for its income, we want to see if the dividends have been stable in the past and if the company has a track record of maintaining its dividend. Pfizer has been paying dividends for a long time, but we only examine the past 10 years of payments for this analysis. The dividend has been stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$0.7 in 2011, compared to US$1.6 last year. Dividends per share have grown at approximately 8.0% per year over this time.

Although dividend payments have been consistent, we need to examine if earnings per share(EPS) are growing as they maintain the purchasing power of the dividend. We can see that Pfizer has grown its EPS at 6.4% per annum over the past 5 years. While EPS is growing, the payout ratio is high enough to limit the growth of future dividend payments.

Limited Dividend Upside Potential

To summarise, shareholders should always check that Pfizer's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend.

We're not keen on the fact that Pfizer paid out such a high percentage of its income, although its cash flow is in better shape. Earnings per share growth have been slow, but we respect a company that maintains a relatively stable dividend.

In sum, we find it hard to get excited about Pfizer from a dividend perspective. While it has a good yield and outperforms the sector, the company had a plan to reduce the dividend before a vaccine boosted earnings put a stop to that plan. While still a solid story in the pharmaceutical sector, this shows us that the dividend might be the first thing to go in case of any turmoil.

Market movements attest to how highly valued a consistent dividend policy is compared to a more unpredictable one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 4 warning signs for Pfizer that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com