Is Pfizer's 7% Dividend Yield Too Good to Be True? Here's the Straight Answer

We can separate high-yield dividend stocks into two broad categories. The first group consists of companies with stable businesses that generate consistent cash flow and are very likely to continue paying -- and perhaps raising -- their dividends for the foreseeable future. The second are distressed corporations. They boast high yields because their share prices have fallen substantially, reflecting weak business fundamentals.

Many investors would put Pfizer (NYSE: PFE) in the second group. The drugmaker's shares have lost significant value over the past five years, as the company has failed to sustain the amazing success it achieved in the coronavirus market. However, there is much more to the story. Let's discuss why Pfizer's 7% forward yield is more sustainable than it appears at first glance.

The business is strengthening

Pfizer's revenue and earnings have declined over the past five years, while it has maintained and even increased its dividend. The company's payout ratio has soared as a result -- it is currently about 127%. That looks unsustainable. But Pfizer's cash payout ratio, a much better measure of whether the company can maintain its dividend program intact, looks less scary at 107.7%. Management is confident of the company's ability to sustain, and even increase, the payout moving forward. That isn't just wishful thinking: Pfizer could improve its business in the coming years and eventually post much stronger financial results.

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Consider that Pfizer boasts highly promising programs in the pipeline that will yield brand-new approvals and label expansions. For instance, the company's Padcev is a cancer medicine that is currently one of its better-performing products. On July 10, Padcev earned approval for the treatment of muscle-invasive bladder cancer in combination with Merck's (NYSE: MRK) Keytruda. Padcev was granted the green light regardless of whether patients are eligible for Cisplatin, a chemotherapy drug for bladder cancer that is effective but comes with significant side effects. That's a big deal since many drugs for bladder cancer (including Padcev, initially) aren't approved regardless of Cisplatin eligibility.

Pfizer sees a large addressable market here, given Padcev's strong phase 3 clinical trial results: It reduced the risk of death or recurrence by 50% compared to the current standard of care in cisplatin-eligible patients with bladder cancer, when combined with Keytruda. This indication could add hundreds of millions of dollars -- perhaps over $1 billion -- to Padcev's peak sales. That may not seem like a lot for a company that generated over $60 billion in revenue last year, but it could land several such regulatory wins, which will add label expansions across its drug portfolio and eventually improve sales growth.

Pfizer's brand-new products may have an even bigger impact. Consider the company's most promising opportunity: the weight-loss market. Pfizer boasts several attractive and highly differentiated anti-obesity candidates. MET-097i, a GLP-1 that is perhaps the most promising among the company's anti-obesity products, is currently being investigated in phase 3 studies as a long-acting candidate. It showed promising mid-stage results, including with monthly dosing.

Provided MET-097i gains approval, it could expand the market by attracting patients hesitant to use GLP-1 medicines due to their weekly dosing schedules or side effects (it also demonstrated strong tolerability). Pfizer is also working on a couple of oral pills for weight loss, yet another category that has proved highly successful. Looking beyond weight loss, Pfizer has an attractive oncology pipeline. The bulk of the company's phase 3 studies are in this area, and with exciting products like PF'4404 -- which belongs to a newer class of medicines that could help revolutionize cancer treatments -- Pfizer's cancer business could improve significantly over the medium term. True, Pfizer still faces some headwinds.

The company will lose patent exclusivity for some key products by the end of the decade, including Eliquis, an anticoagulant. However, Pfizer's deep lineup and equally impressive pipeline could allow it to meet its goal of increasing revenue at a high single-digit compound annual growth rate over the five years starting in 2029. That may not seem like such a big deal, but for a company that has been struggling in recent years, it would be an accomplishment. In the meantime, Pfizer's dividend program should remain intact.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and Pfizer. The Motley Fool has a disclosure policy.