Pfizer (NYSE: PFE) stock has been a boon for growth investors over the past year. In the last 52 weeks, the stock has surged 30%, and Pfizer has been one of the best performers on the Dow in 2013. Even with patent expirations taking a toll on the company's revenue, growth investors have had little to complain about.
But can the same be said for dividend-minded investors? Pfizer offers up a nice dividend, but is this the health care stock income investors need to watch?
A history of strong dividends
Pfizer's 3.3% dividend is a nice payout to investors and ranks seventh out of the 30-member Dow, but it's only an average yield compared to other big pharma rivals. Fortunately, the company has plenty of room to grow that dividend: Pfizer's payout ratio is only 43%, much lower than competitors such as Merck (NYSE: MRK), which sports a whopping 87% payout ratio. Pfizer's comparatively low ratio allows the firm more flexibility in raising its dividend in the future.
That's backed up by Pfizer's attractive dividend history. The company has raised its dividend nine times since 2004, including three times since early 2011 alone, and has a long history of increasing its payout further back in the past. Once again, Pfizer stacks up well against its rivals: Merck, by comparison, has raised its dividend just twice since mid-2004. Pfizer's historical commitment to growing its dividend isn't a promise of future increases, but it's a sign that the company's believed in rewarding long-term investors in the past.
A strong dividend history and low payout ratio are great signs for this stock, but they're not the only components that an income investor needs to watch for. While Pfizer competes in the boom-or-bust pharmaceutical industry, its vast portfolio, promising pipeline, and top blockbuster drugs make it the kind of strong, steady, stable stock for the long term that dividend investors can rely on.
Power in the pipeline, but patent losses loom
A strong pipeline of developmental drugs is key for any long-term pharmaceutical investor, and few companies have a pipeline as rich as Pfizer's. The firm currently has an eye-popping 74 drugs in various stages of discovery, including 24 in phase 3 studies or up for regulatory approval. That future foundation is key for income investors: With patent expirations on major blockbuster drugs such as Lipitor pressuring Pfizer's sales, having a hefty pipeline to find the future blockbusters ensures that the company's dividend won't be threatened.
Pfizer will need to convert those candidates into sales giants, but at least one fresh new drug has a bright future. Blood thinner Eliquis was approved late last year and looks as if it'll be one of the bright stars of Pfizer's future. Analysts have pegged Eliquis' peak sales at around $3 billion, although the drug will have to compete against tough competition, such as Johnson & Johnson's (NYSE: JNJ) Xarelto -- a drug that grew sales sharply in 2012 by pulling in more than $400 million last year and is already approved for several indications in the U.S.
Unfortunately for dividend investors, two of Pfizer's best sellers today have just a few years left to enjoy patent exclusivity. Anti-inflammatory drug Celebrex, which sold more than $650 million last quarter, will face its patent expiration in 2015, while Lyrica -- Pfizer's top-selling drug last quarter -- has until 2018 before it loses its patent protection. These looming losses shouldn't scare income investors away, but it's worth watching Pfizer's up-and-coming developmental drugs closer to see how the company will replace these blockbusters later this decade.
Even with the patent cliff taking a chunk out of Pfizer's sales, this is still a strong and steady stock for the long term -- and one that income investors should love. Pfizer's history of dividend increases and low payout ratio bode well for future raises, and while its current 3.3% dividend yield isn't the strongest dividend in big pharma, it matches up favorably with many other blue chip stocks. Pfizer's one of the best health care stocks regardless of your investment style, but for income investors looking into the medical sector, it's hard to top this pharmaceutical giant.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.