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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.
Who sets Pfizer’s dividend policy?
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.
Pfizer has a normal business mismatch
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.
Pfizer isn’t sitting around hoping for the best. For example, after its own GLP-1 weight-loss drug had to be dropped, it quickly pivoted and bought a company with a more promising GLP-1 candidate. That shows the company is still laser-focused on discovering new drugs in key areas. But it also shows that Pfizer has the capacity to move quickly and strategically when needed.
For example, it has also been creating partnerships. The two most recent agreements are with Chinese companies, one on the GLP-1 side and the other for oncology drugs. All in, Pfizer is doing what it needs to do to deal with upcoming patent expirations.
