There's a lot of excitement today surrounding Pfizer (PFE -3.85%) and the COVID-19 vaccine that it's working on with BioNTech. The vaccine is more than 90% effective in preventing COVID-19, and while that is a great accomplishment, there's much more to the company than just its vaccine. It has a strong business that's produced solid, consistent results over the years.
Today, I'll focus specifically on Pfizer's dividend -- whether it is a great one and if it is suitable for income investors. To be a great dividend, it should not only pay better than the average stock on the S&P 500 does, but it should also be sustainable and likely to grow over the years. Here's a look at how Pfizer's dividend stacks up against those criteria.
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Where its yield is today
Investors who buy a share of Pfizer today will earn $0.38 every quarter. On an annual basis, that comes out to $1.52. And with the stock trading at around $41, that equates to an annual yield of 3.7%. Currently, the typical stock on the S&P 500 is averaging a dividend yield of 1.8%, a benchmark that Pfizer is well above right now.
That difference can add up to a lot of money. If you were to invest $25,000 into Pfizer, you could earn $925 in annual dividend income. With the average S&P 500 stock, you would earn just $450 -- that's $475 less than it would if you invested in the top healthcare stock.
But a good payout means little if a company can't afford to keep paying it. Next, let's look at how safe Pfizer's dividend is.
Is the dividend sustainable?
For Pfizer to be able to keep paying its dividend, it needs to be profitable and generating enough cash. On Oct. 27, the company reported its third-quarter earnings. It reported diluted earnings per share (EPS) of $0.39 -- just slightly above its quarterly per-share dividend. However, the pandemic is negatively affecting Pfizer's business this year, with hospitals deferring medical procedures and regular healthcare being on the back burner as physicians focus on COVID-19. A year ago, Pfizer's EPS was $1.36 in Q3 and left plenty of room to cover its dividend payments.
A more important metric, however, is how Pfizer's performing in terms of cash flow. Through the first nine months of the year, the company has brought in $8.8 billion in cash from its day-to-day operating activities, which is close to the same amount it generated a year ago. After spending $1.5 billion on plant, property, and equipment purchases this year, its free cash of $7.3 billion is more than the $6.3 billion it has paid out in dividends thus far. From both a cash and an income perspective, Pfizer's dividend looks to be in good shape.
However, to truly be a great dividend stock, investors also need to expect that it will rise in value. Otherwise, inflation will slowly chip away at how much you'll really be making from the stock over the years.
Is the dividend likely to grow?
Five years ago, Pfizer was paying a quarterly dividend of $0.28, and the company has increased its payouts by 35.7% since then, averaging a compounded annual growth rate of 6.3%. However, Pfizer isn't a Dividend Aristocrat as it has only been increasing its dividend payments since 2010. That doesn't mean it won't become an Aristocrat, but a company that has increased its dividend payments for 25 or 30 years in a row will have more incentive to continue hiking its payouts and keep the streak going than one that's increased its payouts for only 11 straight years.
Pfizer last announced a dividend increase in December 2019. However, with the business that's doing well and there being plenty of room for Pfizer to continue growing its dividend, odds are the increases will continue for the foreseeable future.
Yes, Pfizer is a great dividend stock
Pfizer's dividend hits all the checkmarks of what investors would likely be looking for in a great dividend stock. There may be concerns that with its Upjohn business (which accounted for 17% of Pfizer's year-to-date sales) spinning off to merge with Mylan, Pfizer's top line will see a drop next year. However, that may not necessarily hurt the bottom line, as the Upjohn division only generated 14% of total segmented earnings thus far in 2020 and was also down more than 40% from the prior-year period.
Overall, Pfizer's business still looks to be in good shape, and it's a great investment whether you're looking for a coronavirus stock to invest in or just a great dividend.
