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The Promise and Perils of Owning Pfizer

Pfizer Inc (NYSE:PFE) has joined the list of High-Yield Dividend Screener & High-Dividend Yield Stocks in Guru's Portfolios.

Based on the share price on Monday, June 22, it offers a dividend yield of 4.43%, more than double the average of the S&P 500, while its share price has been going down--and began going down before Covid-19 was a factor :


GuruFocus Pfizer price chart

Specifically, the price took a dive in the first couple of weeks of July 2019, just before patent protection on the fibromyalgia drug Lyrica expired on July 19th and a generic came to market (according to the 10-K for 2019).

Lyrica is just one of several blockbuster (more than $1 billion in annual sales) drugs for which the company has lost its exclusivity--and some of its margins. The best known of them is Viagra, which also faces generic competition.

At the same time, though, the company has several new drugs in its pipeline and is involved in deal-making with other drug companies. In the annual letter from the chairman and CEO, Dr. Albert Bourla explained, "We began the second half of the year [2019] with a series of actions designed to strengthen each of our businesses and transform Pfizer into a singularly focused, science-driven company."

What were those actions?

  • Announced a plan to combine its Upjohn division with Mylan (NASDAQ:MYL) to create the largest specialty generic company in the industry.
  • Finished its acquisition of Array BioPharma (NASDAQ:ARRY), "a commercial stage biopharmaceutical company focused on targeted small molecule medicines to treat cancer and other diseases of high unmet need."
  • Set up a joint venture between Pfizer Consumer Healthcare and Glaxo SmithKline (GLAXO) "to form the world's largest consumer healthcare business".
  • Finalized the acquisition of Therachon, a clinical-stage biotechnology company focused on rare diseases.



Bourla continued, "When you take a big-picture view over the last decade, you can see that Pfizer has deliberately and thoughtfully divested its non-biopharma businesses through a series of value-creating transactions. At the same time, we have been refining and focusing our approach to R&D to best advance our purpose."

Given these pros and cons, what are we to think of Pfizer as a dividend stock?

Analysis

We will analyze the fundamentals related to the dividend, using the line items in the Dividend & Buy Back section of the Pfizer summary page:

GuruFocus Pfizer dividend and buyback table

Dividend yield

When a company has an above-average dividend (nearly 4.5%) and a slumping stock price, I usually assume the price slump is driving the dividend. However, the yield profile indicates more emphasis should be placed on the dividend:

GuruFocus Pfizer share price and dividend per share chart

The straight-line growth suggests board policy is more of a factor than the stock price.

Dividend payout ratio

Currently, Pfizer is paying out 52% of its earnings in dividends, which appears to be where the company wants to position itself. In its 10-K, management noted, "Our current and projected dividends provide a return to shareholders while maintaining sufficient capital to invest in growing our businesses."

A conservative approach to dividends is to aim for a range between 35% and 55%, while a more aggressive approach would accept a range between 40% and 80%. The latter approach would be more suitable for income investors willing to give up some growth for higher dividends.

GuruFocus reports that, in the last 10 years, the lowest payout ratio was 36% and the highest was 103%, with the median at 73%.

Three-year dividend growth rate

Over the past three years, the dividend has grown by an average of 6.3% per year. With the exception of two years after the 2008 financial crisis, it has raised its dividend every year for almost 30 years.

Forward dividend yield

The forward yield, at 4.55%, is higher than the conventional yield. That happens because the forward yield is based on just the most recent dividend amount, while the conventional yield is based on the four most-recent payments (for Pfizer, there were two payments of 36 cents each and two payments of 38 cents each).

Confirming that is this sentence from a news release on Dec. 16, 2019, "Pfizer increased the dividend over the fourth-quarter 2019 dividend by approximately 6 percent to 38 cents from 36 cents per share. The first-quarter 2020 cash dividend will be the 325th consecutive quarterly dividend paid by Pfizer."

Five-year yield on cost

As we've seen, Pfizer has a history of raising its dividend payment consistently, so we can project what kind of yield it will provide over the next five years: an average of 6.13% per year.

This estimate, which is more reliable than most, tells us what rate of return we would earn if we were to buy the stock today, hold it for five years and reinvest the dividends as they are received.

This refers to the rate of return on just dividends; it does not incorporate capital gains or proceeds from share buybacks. Think of this as the base of what you might earn over the next five years: 6.13% plus potential gains from increases in the stock price and share repurchases.

Three-year average share buyback ratio

With a positive 3 in the table, we are alerted that Pfizer has been buying back its own shares. The green bars next to this line item indicate it has been buying back shares at a faster pace than its peers and than it has done previously:

GuruFocus Pfizer buyback ratio

In its 10-K, it reported it had authorized and spent $32 billion on repurchases between 2014 and the first quarter of 2019. It is currently working on a new $10 billion authorization, however, it does not expect any buybacks this year.

Gurus

Pfizer is extremely popular among the gurus followed by GuruFocus, with 25 of them holding positions in the first quarter of this year. The Vanguard Health Care Fund (Trades, Portfolio) was by far the biggest holder with 64,114,628 shares.

Diamond Hill Capital (Trades, Portfolio) had the second-largest holding with 8,736,531 shares and T Rowe Price Equity Income Fund (Trades, Portfolio) was third with 8,010,000 shares.

Conclusion

In January, GuruFocus contributor Nathan Parsh wrote that the company offers "a strong combination of growth and income." Our examination of Pfizer's dividend has confirmed the second half of his argument.

The company has a dividend yield of almost 4.5%, well above the average for S&P 500 stocks; its payout ratio is in the low 50s, meaning the yield should be sustainable; it has increased the dividend for all but two years in almost three decades; it currently offers a 5-year yield-on-cost of more than 6%--before factoring in capital gains and buybacks; it also has been buying back its own shares, although wisely opting not to do so this year.

All in all, it makes a persuasive case for income investors to give Pfizer further attention.

Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.

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This article first appeared on GuruFocus.