Many income investors probably have mixed emotions about stocks with ultra-high dividend yields. On one hand, they love the tremendous income these stocks provide. On the other hand, they might worry more often than not about a potential dividend cut.
Pfizer (PFE 1.70%) is a case in point, with its forward dividend yield of 7%. Although the stock is a favorite for many income investors, questions about the sustainability of the dividend persist.
But there's good news for income investors following Pfizer's second-quarter update on Aug. 5. Here are three reasons Pfizer's juicy dividend is getting safer.
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1. Free cash flow should improve
The most important number for income investors to watch relating to a company's dividend sustainability is its free cash flow. At first glance, Pfizer's free cash flow might seem to be an area of concern. The company paid out $4.9 billion in dividends during the first half of 2025 but generated free cash flow of only $571 million.
However, Pfizer's financial situation is better than it looks. For one thing, the big drugmaker had to fork over $2.1 billion in tax payment repatriation and a payment to BioNTech for its gross profit split. CFO David Denton said in Pfizer's Q2 earnings call that the company expects improved cash flows in the second half of 2025.
What's more, Pfizer expects to achieve savings in the ballpark of $7.7 billion by the end of 2027 with its cost-cutting initiatives. Denton noted in the Q2 call that around $500 million of these savings will be reinvested in pipeline development. However, the rest could flow down to the bottom line and significantly boost free cash flow.
2. More financial flexibility with a lower leverage target
Pfizer continues to have three priorities in its capital allocation strategy. Income investors will like hearing that the first priority is still maintaining and growing the dividend "over time." The other two priorities are reinvesting in the business and stock buybacks.
However, Pfizer also has a debt load of around $61.7 billion to service. Cash used to pay down this debt reduces the amount available to direct toward the company's capital allocation priorities, including funding the dividend program.
The good news for income investors is that Pfizer has lowered its gross leverage ratio to roughly 2.7. The company's previous target leverage ratio was 3.25. Since Pfizer has already gone below that level, it has set a new target at the current level of 2.7.
Denton told analysts on the Q2 earnings call that the company was able to improve its cash generation faster than anticipated following the Seagen acquisition. While he added that Pfizer will "continue to deliver over time," the company should now have more financial flexibility to achieve its top capital allocation priority of maintaining and growing the dividend.
NYSE: PFE
Key Data Points
3. New products will cushion the blow from the patent cliff
What is the single biggest risk to Pfizer's attractive dividend? I'd put the looming patent cliff at the top of the list. The company faces the loss of exclusivity (LOE) for several of its best-selling drugs over the next few years.
Kidney cancer drug Inlyta loses patent exclusivity later this year. Autoimmune disease drug Xeljanz and anticoagulant Eliquis follow in 2026. Breast cancer drug Ibrance and prostate cancer drug Xtandi have LOEs in 2027. Melanoma and lung cancer therapy Mektovi could join them, pending a patent term extension. Pfizer's lucrative Vyndaqel/Vyndamax/Vynmac franchise is set to lose its key U.S. patent in 2028, pending another patent term extension.
The big pharmaceutical company is looking at billions of dollars in lost revenue as generics and biosimilars take market share away from these drugs. That's money that won't be available to go toward dividend payments.
Now for the good news. Pfizer stated in its Q2 update that the upcoming LOEs should "be largely offset by strong revenue growth from recent launches and acquired products." CEO Albert Bourla highlighted a few of them in his Q2 earnings call comments.
Bourla praised Elrexfio, in particular. He believes the drug could become a standard of care in treating multiple myeloma, a market that's projected to reach around $44 billion by 2027. Sales for Elrexfio nearly quadrupled year over year in Q2.
Sigvotatug vedotin (SV) is another highly promising candidate in Pfizer's pipeline. Bourla said that the experimental antibody-drug conjugate (ADC) could be a key growth driver before the end of the decade. SV targets non-small-cell lung cancer, a market that is likely to top $60 billion by 2030.
He also pointed to Pfizer's recent in-licensing agreement with Chinese drugmaker 3SBio for bispecific antibody SSGJ-707. Bourla stated in the Q2 call that this therapy "has the potential to deliver breakthroughs for patients in the next way in PD-1 immunotherapy, which is an established $55 billion market."
Strong floor, no ceiling
How confident is Pfizer's management team about the business going forward? Bourla put it this way: "I will describe Pfizer right now as a company with a very strong floor and no ceiling." That's a description of a stock with a 7% dividend yield that income investors should like to hear.
