Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.
But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two leading health-care companies will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.
Tale of the tape
Founded in 1849, Pfizer (PFE +1.68%) is one of the world's largest pharmaceutical companies. It has developed many blockbuster drugs over the years, and has played a critical role in moving the industry toward a more promotional mind-set in recent decades. Headquartered in New York, Pfizer has augmented its global health care portfolio through various major acquisitions over the past decade: Warner–Lambert in 2000; Pharmacia in 2003; and Wyeth in 2009. Earlier this year, Pfizer spun off Zoetis, previously known as Pfizer Animal Health, to focus on the development of drugs and vaccines for humans.
CVS Caremark (CVS 0.73%), formed by the merger of CVS Pharmacy and Caremark Rx in 2007, is among the Top 20 Fortune 500 companies in the U.S. Headquartered in Woonsocket, Rhode Island, CVS is the largest U.S. pharmacy in terms of total prescription revenue, and has more 7,500 CVS/pharmacy stores, 31 specialty pharmacies, and around 650 MinuteClinic locations in 27 states. CVS is also expanding internationally, with the recent acquisition of retail drugstore chain Onofre in Brazil.
|
Statistic |
Pfizer |
CVS Caremark |
|---|---|---|
|
Market cap |
$200.3 billion |
$73.7 billion |
|
P/E ratio |
19.6 |
17.8 |
|
Trailing 12-month profit margin |
46.6% |
3.4% |
|
TTM free cash flow margin* |
26.6% |
2.6% |
|
Five-year total return |
30.3% |
60% |
Source: Morningstar and YCharts.
*Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.
Round one: endurance (dividend-paying streak)
Pfizer is one of long-term investors' favorite dividend stocks, as it's paid uninterrupted dividends for a continuous period of more than 30 years since initiating payment in 1982. CVS misses by a narrow margin of just three years, but it has also made regular payments to shareholders since 1985.
Winner: Pfizer, 1-0.
Round two: stability (dividend-raising streak)
Although Pfizer has paid regular dividends without reduction since 1982, it was forced to cut payouts during the financial crisis, and only resumed its trend of increasing payouts in 2010. By contrast, CVS' dividend payout has soared every year since 2008, with some hefty jumps seen in payments over the past couple of years.
Winner: CVS, 1-1.
Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:
PFE Dividend Yield (TTM) data by YCharts
Winner: Pfizer, 2-1.
Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's look at the growth in payouts over the past five years.
PFE Dividend data by YCharts
Winner: CVS, 2-2.
Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:
PFE Cash Dividend Payout Ratio TTM data by YCharts
Winner: CVS, 3-2.
Bonus round: opportunities and threats
CVS Caremark may have won the best-of-five on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.
Pfizer opportunities
- Pfizer's new rheumatoid arthritis treatment, Tofacitinib, was recently approved.
- Licensed breast cancer treatment Palboclib got breakthrough therapy status from the FDA.
- The company has recently announced a new $10 billion share-repurchase program.
- Eliquis, which prevents strokes in patients with atrial fibrillation, was approved by the FDA.
CVS Caremark opportunities
- The company is best-positioned to benefit from new Obamacare-covered patients.
- CVS added prescription drug purchases to its ExtraCare rewards program.
- The company has plans to open more than 1,500 MinuteClinics in the U.S. by 2017.
Pfizer threats
- Pfizer's chronic myeloid leukemia drug, Bosulif, was rejected by U.K. regulators.
- Pharmaceutical companies have been facing major revenue losses from patent expirations.
CVS Caremark threats
- CVS Caremark may lose market share to to Walgreen (WAG +0.00%) now that it's made up with Express Scripts.
- Rite Aid and Walgreen should also be expanding their health-care clinics.
- The slim margins of retail pharmacies could be hurt by a three-way race to the bottom.
One dividend to rule them all
In this writer's humble opinion, it seems that CVS Caremark has a better shot at long-term outperformance, thanks to its ability to augment its widespread geographical reach in the United States with new technologies, as well as its aggressive expansion plan for the next few years. By contrast, Pfizer faces fierce competition from generic drugs, but its proven competencies could result in many blockbuster treatments. You might disagree, and if so, you're encouraged to share your viewpoint in the comments below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!
