Pfizer (NYSE:PFE) hasn't delivered impressive stock gains in recent years. However, investors have at least been able to count on solid and steadily increasing dividends from the big drugmaker. For most of the last 18 months, Pfizer's dividend yield has easily topped 4%.
But the story is about to change: Pfizer intends to cut its dividend in the near future. Here's what you need to know.
Why is Pfizer cutting its dividend?
Usually when a company cuts its dividend, it's not a good sign. In this case, however, there's nothing to worry about.
Pfizer announced in July 2019 that it planned to spin off its Upjohn unit and merge the business with Mylan. This transaction closed in November 2020 with the formation of Viatris (NASDAQ:VTRS). Pfizer shareholders owned 57% of Viatris while Mylan shareholders owned 43%.
From the beginning, Pfizer stated that it would reduce its dividend payout after the divestiture of Upjohn. This made sense because the unit contributed nearly 20% of Pfizer's total revenue in 2019.
When will it happen?
Pfizer intends to reduce its dividend payout when Viatris initiates its dividend program. That's on the way very soon; Viatris expects to declare its first quarterly dividend in May. The dividend will be paid in June.
How much lower will Pfizer's dividend be?
All along, Pfizer's goal has been to ensure that investors who held its shares prior to the Viatris deal would receive roughly the same dividend payments after the transaction concluded as they did before the close. The main difference is that they would receive a new dividend from Viatris and a lower dividend from Pfizer that, combined, would match Pfizer's previous dividend payment.
Pfizer currently pays a quarterly dividend that equates to an annualized dividend rate of $1.56 per share. Viatris expects its quarterly dividend will be $0.11 per share, which amounts to an annualized dividend rate of $0.44.
For every 100 Pfizer shares owned, Pfizer shareholders received 12 Viatris shares. Therefore, to keep the combined dividend of the two companies the same as Pfizer's previous dividend, Pfizer will reduce its annual dividend to close to $1.51 per share.
What will Pfizer's dividend yield be?
Dividend yield is calculated by dividing the annual dividend per share by the current share price. Because Pfizer's share price will fluctuate between now and the time that it actually cuts its dividend, it's uncertain exactly what its dividend yield will be. However, using Pfizer's share price as of April 9, its dividend yield would be close to 4.1% after the company reduces its dividend.
Will Pfizer's dividend increase again after the cut?
Pfizer CEO Albert Bourla stated in the company's fourth-quarter conference call that Pfizer will grow its dividend, but "at a slower rate." He emphasized that the dividend "is an important thing, part of our investment thesis."
Is Pfizer's dividend cut good or bad for investors?
Probably the best answer to this question is that it depends on the individual investor.
If you're an income-seeking Pfizer shareholder who received shares of Viatris last year and held onto those shares, the total amount of the dividends that you receive won't change. If you sold your Viatris shares, your quarterly dividend from Pfizer is about to be reduced slightly. On the other hand, you also pocketed extra cash from the sale of your Viatris stock.
If you're an income-seeking investor who bought Pfizer shares after the Viatris transaction, your dividend income will soon be lower. However, you'll still likely benefit from the deal. Pfizer's revenue and earnings growth should be significantly higher without the older drugs (with declining sales) that were part of Upjohn.
Even with a lower payout, Pfizer's dividend will remain quite attractive. The company has strong growth prospects, particularly with its successful COVID-19 vaccine. The stock is also relatively cheap, with shares trading at around 11.4 times expected earnings. Overall, despite its impending dividend cut, Pfizer is arguably the best big pharma stock to buy right now.
Editor's note: A previous version of this article incorrectly calculated Pfizer's anticipated future dividend cut and dividend yield. The Fool regrets the error.