Pfizer: Dividend Dynamo, or the Next Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Pfizer (NYSE: PFE  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Pfizer yields a solid 4.3%, considerably higher than the S&P 's 2%.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Pfizer has a payout ratio of 55%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Pfizer has a debt-to-equity ratio of 45% and interest coverage of 11 times.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Let's examine how Pfizer stacks up next to its peers:

Company

Earnings Per Share Growth

Dividend Per Share Growth

Pfizer

(5%)

(3%)

Johnson & Johnson (NYSE: JNJ  )

2%

10%

Merck (NYSE: MRK  )

(10%)

0%

Abbott Labs (NYSE: ABT  )

7%

10%

Source: S&P Capital IQ.

The Foolish bottom line
Pfizer exhibits a fairly reasonable dividend bill of health. It has a big yield, a moderate payout ratio, and a manageable burden. Dividend investors will want to keep an eye on the company's earnings growth, which is the biggest potential cause for concern, particularly with several of the company's blockbuster drugs coming off-patent in the near future. To stay up-to-speed on Pfizer's progress, add it to your stock watchlist. If you don't have one yet, you can create a free, personalized watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Johnson & Johnson and Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Abbott Laboratories, Pfizer, and Johnson & Johnson; and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1699706, ~/Articles/ArticleHandler.aspx, 4/19/2014 2:26:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement