Pfizer's Earnings Have Declined 58% This Year. Is a Dividend Cut Around the Corner?

Dividend cuts don't typically happen without warning. Investors can see a business that's in trouble. Perhaps it's in the midst of a turnaround, it's restructuring, or its profits are simply declining, and the dividend may no longer be sustainable. These are all things to watch out for and consider before investing in a stock for its dividend.

Pfizer (NYSE: PFE) is a top healthcare stock, which investors have relied on for years for its growth and reliable payouts. But recently, it has had trouble attracting many investors due to question marks around its growth prospects and its poor financials. This year, its earnings are down big. Does that mean a dividend cut could happen soon?

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Is Pfizer's dividend still sustainable?

Pfizer has been struggling to generate much growth, meanwhile, its expenses have been on the rise as it restructures its business and incorporates recent acquisitions into the fold. In its most recent quarter, which ended on June 30, it incurred a net loss of $248 million, largely due to $3.8 billion worth of impairment charges related to in-process research and development assets.

On a year-to-date basis, the company's net income totaled $2.4 billion, which was down 58% from the $5.9 billion it reported a year ago. Clearly, a big part of the reason for the decline relates to the recent impairment. The good news for income investors: it's a non-cash charge.

What may be more important is to focus on free cash flow, which tells investors how much cash the business has available to fund its payout. The number represents how much cash flow is left after deducting capital expenditures, which are necessary for the company's growth.

Cash can fluctuate significantly depending on when a company pays bills and collects revenue, which is why it's helpful to look beyond just a single period. Over the past four quarters, Pfizer's free cash has totaled $11 billion, which is more than the roughly $9.8 billion it has paid in dividends during that stretch. That's a positive sign that the dividend may still be safe.

Pfizer has a lot of upside, but it does come with risk

Year to date, Pfizer's stock has risen by 9%, but over the past five years, it's down a massive 44%. If it can show that its acquisitions are paying off and get back to growing, as it plans to, then there may be room for the stock to rise significantly higher. But there are no guarantees. The same goes for its dividend, which yields 6.4%. It appears safe for now, but if the company has to conserve cash to invest it into its future growth, there is the possibility that a cut to the payout may happen.

Pfizer could be a good stock to buy for the long haul, but there are definitely safer options out there for income investors.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.