Is Pfizer’s 5.7% dividend yield worth the risk?

High-yielding dividend stocks offer two key benefits. They provide regular cash flow through dividend payments and, when dividends are consistently reinvested, have often outperformed S&P 500 for extended periods.

However, the high returns are worth a look. They often result from declining share prices or overly generous payout policies. The payout ratio, which measures the proportion of earnings distributed as dividends, is a critical metric. Ratios exceeding 75% can signal unsustainability, which can lead to dividend cuts and subsequent share price declines.

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The pharmaceutical giant Pfizer (PFE 0.38%) stands out in this context. The company currently offers a dividend yield of 5.7% – the highest among major drugmakers and one of the highest in the entire healthcare sector. However, Pfizer’s payout ratio of 436% raises significant sustainability concerns.

Is Pfizer’s Big Dividend Worth the Risk? Let’s dig deeper to find out.

A pharmaceutical powerhouse facing challenges

Pfizer is a global pharmaceutical giant with an impressive portfolio of over 350 marketed drugs, 113 experimental candidates in clinical trials and a presence in over 200 countries. Despite this commanding position, the company’s stock has stumbled recently, falling 52% from its three-year high.

This significant decline stems primarily from the Pfizer franchise’s once-booming COVID-19 sales decline. However, amid this key challenge, Pfizer’s current valuation may represent an interesting opportunity for both bargain hunters and yield-seeking investors.

Drilling down, Pfizer shares now trade at just 9.6 times estimated 2026 earnings, a notable discount in the typically premium-laden pharmaceutical sector. This attractive valuation, combined with the stock’s high dividend yield and Pfizer’s strong market position, creates a compelling value proposition for investors with a long-term horizon.

Dividend sustainability concerns

Pfizer’s 5.7% dividend yield, while attractive, raises significant sustainability concerns. The company’s payout ratio skyrocketed to 436%, well above the 75% threshold that usually signals potential dividend volatility. This ratio is not only alarmingly high in absolute terms, but also stands out as the largest among Pfizer’s large pharmaceutical and biotech companies.

PFE Payout Ratio data (annual) by YCharts.

But the context is crucial. The pharmaceutical industry often faces periods of high payout rates due to its capital-intensive nature and limited patent protection for branded drugs. These factors may lead to temporary increases in this value. Indeed, the average payout ratio among Pfizer’s peer group is 141% — already quite high, but still beaten by Pfizer’s 436%.

Wall Street’s reaction to these numbers was decidedly bearish. Pfizer shares have fallen 14% over the past 12 months, reflecting investor skepticism about its ability to maintain its current dividend levels. This negative sentiment persists despite Pfizer’s strong commercial performance in the first half of the year, including several blockbuster new drug launches.

Management’s position and outlook

During Pfizer’s second quarter 2024 conference call, management reaffirmed its commitment to maintaining and growing the dividend as a top priority. That position is supported by the company’s 15-year streak of consecutive dividend increases and no cuts since its $68 billion acquisition of Wyeth in 2009.

To reinforce this commitment, Pfizer has implemented a cost savings plan targeting $4 billion in net savings by the end of the year. This initiative aims to improve free cash flows and support short-term dividend sustainability.

Looking ahead, Pfizer’s pipeline includes several potential blockbuster cancer drugs, notably vepdegestrant for breast cancer and sigvotatug vedotin for lung cancer. If successful in clinical trials, these high-value drugs could generate annual sales of more than $1 billion.

Successful launches of these drugs could significantly boost Pfizer’s top-line growth and earnings power in the second half of the decade. This improved financial performance could help bring the company’s payout ratio closer to its historical average of around 50%.

The Verdict: A calculated risk worth considering

While nothing is guaranteed in investing, the market’s pessimism about Pfizer’s near-term prospects may be overblown. Management’s firm commitment to dividend growth, cost-cutting measures and a number of promising drugs suggest upside potential.

Also, Pfizer stock is currently trading at a significant discount to many of its big pharma peers, potentially providing a margin of safety for investors buying at current levels. While the high payout ratio is a concern, the company’s strong market position, diverse product portfolio and proven innovation engine provide some assurance that this situation will ultimately prove temporary.

Given these factors, Pfizer is considered an interesting option for investors looking for high yield opportunities. However, as with all high-yield stocks, monitoring the company’s financial health and dividend coverage will remain crucial.