Pfizer's 6.7% Yield Looks Scary -- but the Dividend Story Is Stronger Than It Seems
Written by Reuben Gregg Brewer for The Motley Fool -> Pfizer is a highly respected pharmaceutical company. The drug maker is dealing with a mismatch between its new drug development and patent expirations. Management is standing behind the dividend, and it has the room to keep
The drug maker is dealing with a mismatch between its new drug development and patent expirations.
Management is standing behind the dividend, and it has the room to keep paying it for now.
The S&P 500 index (SNPINDEX: ^GSPC) has a tiny yield of 1.1%. The average pharmaceutical company's yield is 1.7%. Those comparison points make Pfizer 's (NYSE: PFE) 6.7% dividend yield look shockingly large. If you are a dividend investor, is it worth buying Pfizer, or is the risk of a dividend cut too great? The dividend is probably on stronger ground than you think.
When you boil it all down, the board of directors decides on a company's dividend policy. It is entirely up to this group. Obviously, they don't work in a vacuum. The board consults with a company's CEO and other top executives before making a dividend decision. So, what management says is often a good indication of what the board is thinking.
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In Pfizer's case, management is making a clear statement that its goal is to maintain the dividend. In fact, it stated exactly that on a first-quarter earnings slide titled "Invest to Maximize Post-2028 Growth." The dividend was right there with investing in research and development, launching new products, and making bolt-on acquisitions.
That's not a guarantee that the healthcare giant's dividend won't be cut. But it is a strong indication that the company understands that dividends are important to its shareholders. And that the goal is to support the current payment through what is very clearly a difficult period.
The big issue the company faces is fairly normal for a pharmaceutical company . It has patent expirations coming up that will lead to a revenue reduction, and it doesn't have any new drugs on the horizon to offset the impact. Patent expirations happen on a set schedule, but research and development does not. So timing mismatches like this are fairly commonplace in the drug sector.
