In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal, but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Pfizer (NYSE: PFE), which posts a 4% dividend yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

(1.1%)

Source: Pfizer investor relations.

Before it halved its dividend in 2009, Pfizer had increased its annual payouts for more than 40 consecutive years, giving it one of the best dividend track records in the U.S.

But that was then. To its credit, Pfizer has raised its payout by 25% since the dividend was cut, though that's little comfort to longtime shareholders who are still being paid 38% less than they were in 2008. Due to the negative five-year growth rate, Pfizer scores a 1 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

10 times

10%

5

EPS payout ratio

73.7%

10%

4

FCFE payout ratio

70.4%

30%

4

Source: Capital IQ, a division of Standard & Poor's, as of March 17.

Pfizer has a fairly strong balance sheet and it can cover each $1 in interest with $10 in operating earnings. Morningstar gives Pfizer a "AA" credit rating.

Though the earnings payout ratio is a bit high, it's still well below precut levels. In 2007, for example, the payout ratio was 98%; in 2008, Pfizer was paying more than 100% of its earnings.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

73.7%

10%

3

FCFE payout ratio

70.4%

20%

3

Sustainable growth rate

2.4%

10%

1

This is where things look a little less promising for Pfizer's dividend. Despite meaningful dividend hikes since the dividend cut, it's not clear how much more Pfizer can pay out unless it can also drive earnings growth. Analysts expect long-term earnings growth to be around 2%.

Pfizer appears to have enough free cash flow coverage to modestly grow the dividend even if earnings growth is slow, so I would expect annualized dividend growth over the next five years to be in the low- to mid-single-digit range.

Competitors
An "ungraded" section of the dividend report card compares a stock's current yield against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or cut the payout, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Eli Lilly (NYSE: LLY)

5.6%

(8%)

Merck (NYSE: MRK)

4.7%

5%

Abbott Laboratories (NYSE: ABT)

4.0%

10%

With its current yield at 4%, Pfizer's dividend yield is in the lower half of the big pharmaceutical average despite rather modest analyst growth expectations.

Pencils down!
With all the numbers in, here's how Pfizer's dividend scored:

Weighting

Category

Final Grade

10%

History

1

 

Sustainability

 

10%

Interest Coverage

5

10%

EPS Payout Ratio

4

30%

FCFE Payout Ratio

4

 

Growth

 

10%

EPS Payout Ratio

3

20%

FCFE Payout Ratio

3

10%

Sustainable growth

1

100%

Total Score (out of 5)

3.2

 

Final Grade

C+

Pfizer's early 2009 dividend cut is still fresh in many investors' memories, but it appears much healthier than it did in 2007 and 2008. Investors considering Pfizer as a dividend play, however, should figure out if the combination of 4% current yield and low- to mid-single-digit dividend growth potential is a better deal than other pharmaceutical shares are offering.

Have you added Pfizer to your Watchlist yet? Well what are you waiting for?

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He does not own shares of any company mentioned. Pfizer is a Motley Fool Inside Value choice. The Fool owns shares of Abbott Laboratories. Motley Fool Alpha LLC owns shares of Abbott Laboratories. 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.