When looking to invest in dividend stocks, chasing high yields isn't always an advisable strategy. Companies with juicy yields are only worth investing in provided they can support their payouts. We saw just recently that even otherwise solid income stocks with incredible yields can resort to slashing their dividends; that's exactly what happened to Walgreens Boots Alliance and Medical Properties Trust.
Not every high-yield stock will suffer this fate, though. Here is one that likely won't: Pfizer (PFE +1.34%). Though the drugmaker has experienced some issues lately, long-term investors should stick with the stock. Let's find out why.
Beyond the pandemic
Pfizer faced an aging portfolio of products and slow revenue growth (at best) before the pandemic. Things only got worse when one of the company's products called Xeljanz, an immunosuppressant, was found to have an increased risk of cardiovascular events and cancer compared to another class of immunology drugs in a post-marketing study in early 2021. The fallout was a boxed warning for Xeljanz.
These issues (and others) explain why Pfizer decided to shake things up, get rid of slower-growing units to focus on its biopharmaceutical business, and shop for deals.
The company struck gold with its decision to enter the COVID-19 vaccine market. Beyond the stratospheric sales Pfizer was able to generate from its coronavirus-related portfolio -- it became the first company in the industry to reach $100 billion in annual revenue -- this success allowed Pfizer to rejuvenate its pipeline and set a foundation for a much more promising future. As they say, progress is a slow process, but it is happening for Pfizer.
NYSE: PFE
Key Data Points
Last year, Pfizer had a historic streak of brand-new product approvals. The company will likely continue down that path this year though it may not be as impressive as in 2023. Pfizer also acquired Seagen, an oncology specialist with an incredibly deep pipeline, for $43 billion. This new partnership could lead to several blockbuster products given Seagen's raw innovative potential and Pfizer's much larger resources.
It's easy to focus on Pfizer's current financial results, which don't look strong. In the first quarter, the company's revenue of $14.9 billion dropped by 20% year over year. Pfizer's adjusted earnings per share of $0.82 was down by 33% compared to the first quarter of 2023. However, Pfizer's performance in 2021 and 2022 was always going to be a tough act to follow. Excluding the company's COVID-19 portfolio, Pfizer's top line increased by a very respectable 11% year over year.
The COVID-19 market remains somewhat unpredictable. Once things stabilize on that front, Pfizer's revenue will start moving in the right direction, especially as its newer products grow in prominence. Pfizer isn't just some "pandemic stock." The drugmaker's prospects beyond this market still look excellent.
Trust the process
Pfizer might not bounce back immediately, but that shouldn't matter much to investors in it for the long haul. This is a case where patience will be rewarded. Pfizer is an innovative company offering a vast portfolio of products no one wants to skimp on. What about the company's dividend? Pfizer's forward dividend yield currently tops 5.87%. It has increased its payouts by 61.54% in the past decade. But the drugmaker's cash payout ratio looks unsustainable at 182.5%.
That's likely due to the company splurging on a slew of acquisitions in recent years. However, management doesn't appear worried. During the company's first-quarter earnings conference call, CFO Dave Denton said, "Our strategy consists of maintaining and growing our dividend over time, reinvesting in our business at an appropriate level of financial return, and making value-enhancing share repurchases after de-levering our balance sheet."
Pfizer did raise its payout during the first quarter, a sign that the company isn't just paying lip service to investors. Its dividend program will be just fine, in my view, as both revenue and net income growth get back on the right track. Those who opt to reinvest that dividend will see their returns boosted over the long run.
Don't ignore Pfizer just because of its current poor financial results. The pharmaceutical giant has a lot to offer long-term, income-seeking investors.
