If a dividend stock is struggling and falling in value, that pushes its yield up. This happens because while you are getting the same dividend, it is now costing you less money to acquire it. As long as the dividend remains sustainable, buying a dividend stock on a dip in price or near a low can be an advantageous thing for income investors to do.
Pharma stock Pfizer (PFE 1.35%) has dropped more than 30% in value over the past 12 months and is now trading near its 52-week lows. Today, its dividend yield is an incredible 6.1%, which is well above the S&P 500 average of 1.4% and also far higher than what Pfizer's dividend has been in the past. Has Pfizer become an incredible buy for dividend investors, and is it the best dividend stock you can own today?
NYSE: PFE
Key Data Points
Is Pfizer's dividend safe?
A crucial question for investors any time they deal with a high-yielding dividend, particularly one that's yielding more than 5%, is whether or not the payout is safe. If a dividend isn't sustainable, then that means a dividend cut could be around the corner, and it may not be much of a deal for investors.
If you were to look at Pfizer's payout ratio based on earnings, it would look unsustainable. For 2023, its diluted earnings per share totaled just $0.37; the company's dividend totals $1.68 per year. But that is a bit misleading because while Pfizer did have an off year in 2023, its results were hampered by asset impairment charges, which don't affect cash and are nonrecurring.
In terms of free cash flow, Pfizer's dividend looks much more sustainable, with the company typically generating more free cash than its dividend payments.
Fundamental Chart data by YCharts
This suggests that while Pfizer's dividend is high, it may not be in danger of a cut.
Is Pfizer's business in good shape?
Another important question for dividend investors to consider is the state of the overall business. While the dividend may look safe based on its recent results, what matters is what the future holds and whether the upcoming results will be strong enough to support the dividend.
This is the bigger risk for Pfizer. The company is facing many headwinds as top products are losing exclusivity in the near future, and revenue from its COVID vaccine and pill is also likely to diminish. The healthcare company is leaning on acquisitions and its pipeline to help fill in the gap and to grow its top line.
The acquisition of cancer company Seagen last year will assist with that goal. The deal is part of a broader plan for Pfizer to add $25 billion in revenue by 2030. That would be great news if the company wasn't also facing an $18 billion loss in revenue as multiple key drugs lose patent protection in the years ahead, including Eliquis, Vyndaqel, Xeljanz, and others.
It isn't an easy path ahead for Pfizer, but the business is planning ahead. This is a good thing, as that reduces some of the long-term risk for investors. By acquiring companies and investing in its pipeline, Pfizer's business should be in good shape.
Has Pfizer's stock become a no-brainer buy for dividend investors?
Pfizer has paid a quarterly dividend for 341 consecutive quarters -- that's a span of more than 85 years. The company has made a reliable dividend investment for decades, and while it hasn't always increased its payout, it has been a consistent income-generating investment during recessions and even wars.
There is some risk that comes with the stock today simply because of the uncertainty ahead with respect to how well its plan for growing revenue and earnings will pan out. But with a strategy in place and acquisitions helping to bolster its prospects, investors should feel confident that the company is on a good path forward.
Pfizer's high yield and low valuation -- the stock trades at an estimated 12 times its expected future earnings -- makes for a very attractive opportunity. If you're looking for a top healthcare stock and are OK with some risk in exchange for some high potential gains down the road, then this could be the best dividend stock you can buy right now.
