Facing economic uncertainties or prolonged downturns, investors typically seek the safe haven of defensive stocks. Large multinational pharmaceutical companies fall into this category. Illness does not know or care about economic conditions, causing individuals to seek treatment for what ails them. While not entirely recession-proof, pharmaceutical companies can weather the storm better than many companies in other industries.
Stalwart Pfizer (NYSE:PFE) ranks third among the biggest of these giants. Only Johnson & Johnson and Swiss-based Roche Holdings have larger market capitalizations. The household name famous for blockbuster drugs like Lipitor, Lyrica, and Viagra expects 2020 to be a transformational year as it slims down to focus on high-value medicines to grow its bottom line.
When it comes to dividend yield, Pfizer takes third place on the podium again. Its current 3.98% yield outperforms most of its pharma peers, whose yields are 3% or less. However, AbbVie and GlaxoSmithKline pay dividends yielding approximately 4.9%.
Pfizer has increased its payout annually since 2009, growing from $0.16 to the current $0.38 per quarter. While the consistency over the last decade is admirable, Pfizer slashed the dividend in half in 2009. Keep in mind that the timing coincided with the last global economic crisis. This begs the question: What will Pfizer do in today's coronavirus pandemic-driven downturn?
Not one, but two dividends
Last summer Pfizer announced that it will spin off its generic drugs unit Upjohn and merge it with another global generics company, Mylan. The new entity, called Viatris, will have a global footprint and expects to generate $19 billion to $20 billion in revenues.
Investors should understand this transaction for three reasons. First, shareholders in Pfizer will end up owning 57% of Viatris. That means every Pfizer shareholder will receive a stake in Viatris. Think of it as a dividend in the stock in the new company. Second, Viatris plans to pay its own dividend. Highlighted in the transaction announcement is that Viatris expects to pay shareholders 25% of free cash flow starting in the first full quarter of operations. By owning Pfizer shares before the transaction, investors will end the year with two dividend-paying stocks in their portfolios.
The third important reason for the transaction relates to the Upjohn business itself. First-quarter revenues from the Upjohn unit dropped 37% year over year, dragging down Pfizer's overall performance. Generic competition for former blockbuster drug Lyrica was partly to blame.
In the first quarter, Pfizer generated $4.5 billion in adjusted income on sales of $12 billion for the first quarter of 2020. This represented an 8% decline over the prior year. The biopharma business, which includes its branded pharmaceuticals, witnessed 11% revenue growth. The transaction carves out the off-patent drug portfolio, slimming Pfizer down to focus on higher-value, prescription medicines.
Pfizer reaffirmed full-year guidance in the range of $48.5 billion to $50.5 billion in revenues. This number includes the Upjohn business. Excluding Upjohn for the year -- what it dubs "New Pfizer" -- revenue guidance ranges from $40.7 billion to $42.3 billion. While Pfizer's dividend will be reduced following the spin-off, it appears fully capable of maintaining its track record of dividend growth from here on out.
Both healthcare and generalist investors seek to find safety, particularly as unemployment numbers skyrocket and the economy looks destined for a recession. Owning a solid company like Pfizer provides steady income of around 4% through its dividend yield despite the current coronavirus pandemic.
Following successful completion of the Viatris transaction this year, investors will own two global pharma giants and receive two dividends. Furthermore, each company's stock has the ability to appreciate in value independently. This makes it an attractive opportunity for a patient, dividend-seeking investor.