Pfizer (PFE 0.10%) provides investors with an attractive dividend that currently yields 4.7%. To collect $1,000 in annual dividends at that rate, you would need to invest approximately $21,300. Compare that with the nearly $65,000 you would need to invest in the average S&P 500 stock, which yields around 1.5%, to generate the same payout, and it's easy to see why Pfizer can be an attractive income investment to buy and hold.
But in the company's recent earnings report, profits plunged as Pfizer's COVID-related revenue nosedived. Given the headwinds it's facing right now, is Pfizer stock a good option for dividend investors, or could the payout be in danger of being cut?
Pfizer's earnings crashed in Q2
On Aug. 1, the healthcare giant unveiled its second-quarter earnings numbers, for the period which ended in June. In Q2, Pfizer's sales of $12.7 billion were down 54% year over year. The big reason for the drop was a decline in revenue for Comirnaty, its COVID-19 vaccine. At less than $1.5 billion, its sales were down 83%. And Paxlovid, its COVID pill, generated just $143 million in sales versus the $8.1 billion it brought in during the prior-year period.
As a result of the softer top line, there was much less profit for the business. At $2.3 billion, Pfizer's net income was down a massive 77% from the same period last year. Earnings per share (EPS) came in at $0.41 versus $1.77 a year ago.
Is the dividend at risk?
The concern for investors is now whether Pfizer's dividend has become unsustainable. The company currently pays out $0.41 in dividends per share each quarter. If its EPS doesn't improve, that would put Pfizer's payout ratio at 100% of earnings.
Pfizer does, however, project that its adjusted EPS will be between $3.25 and $3.45 this year. That would mean the company should be paying out no more than half of its adjusted EPS. Adjusted earnings numbers often exclude non-cash expenses and can be more reflective of a company's true earnings power.
But what could complicate things is the company's need for growth and acquisitions. While the dividend is important for Pfizer's investors, so too is growth. The company is facing an increase in competition as it is losing exclusivity to drugs over the next several years, which will put more of a dent in its top line. That means Pfizer is going to need to use more resources to fund its growth initiatives, which could put a strain on cash.
An impressive record for paying dividends
Pfizer declared its third-quarter dividend in June (which is payable in September). This marks the 339th consecutive quarterly payout it will make to investors. Although it isn't a Dividend King, Pfizer has been making regular increases to its payouts in recent years:
PFE Dividend data by YCharts
The company's strong track record should give investors confidence in the business. For decades, this has proven to be a reliable dividend stock to own, and it's no stranger to adversity. That doesn't guarantee the future will be safe, but with Pfizer's adjusted EPS numbers being well above its dividend payments, there doesn't appear to be any cause for alarm right now.
Its dividend growth rate might slow down, but I wouldn't expect Pfizer to stop its payouts or cut them unless its financials were to significantly deteriorate even further than they already have.
Is Pfizer a buy?
Shares of Pfizer are near their 52-week lows as investors are clearly concerned about the company's future. But at less than 11 times its estimated future earnings, Pfizer is already trading at a fairly decent discount -- the average healthcare stock trades at a multiple of over 18.
The company is working on developing and diversifying its operations. CEO Albert Bourla plans to add $25 billion to the top line by the end of the decade to help offset declining sales from existing products.
Pfizer's near term may be concerning, but in the long run it can still make for an excellent investment. With its valuation down, this has the potential to be an underrated dividend stock to buy right now, both for its high yield and the potential upside it may possess as the company expands its operations and brings new products to market.
