How Concerned Should Income Investors Be About Pfizer's Dividend?

Pfizer (NYSE: PFE) is not hitting on all cylinders today. That's why the stock is down more than 50% from its 2021 high, as of this writing, and its payout ratio is well north of 100%. Dividend investors may find the huge 6% yield attractive, but before buying, you have to ask if that dividend is actually sustainable. The answer is likely yes, here's why.

Dividends don't come out of earnings

The financial impact of dividends shows up on the cash flow statement, not the earnings statement. This is important to understand as you look at the payout ratio, which compares dividends to earnings. It is definitely a good thing if earnings cover the dividend, which Pfizer's earnings do not right now, but it isn't necessary for this to be the case for a company to continue supporting its dividends.

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When you compare Pfizer's cash flow to its dividend, using the cash dividend payout ratio, the figure comes in at roughly 90%. That's high, but it suggests the pharmaceutical giant can continue covering the payment for now. Backing that up is nearly $12.7 billion in cash and short-term investments on its balance sheet at the end of the second quarter of 2026. The company paid roughly $4.9 billion in dividends through the first half of the year. It could cover more than a year of dividend payments with that cash alone.

Also, the company is openly stating that it wants to maintain the dividend in the near term. Management probably wouldn't be so vocal about that if the board of directors were seriously considering a dividend cut.

The real issue is Pfizer's business

The problem right now for Pfizer is that it is dealing with patent expirations, but it hasn't found new drugs to replace the revenues being lost from the old ones. That's actually pretty normal in the drug sector, since research and development doesn't operate on a fixed schedule, even though patent expirations do. Mismatches like the one that is happening today are really pretty common in this highly competitive segment of the healthcare sector, with a number of the company's peers basically in the same boat.

However, given Pfizer's long history of success, it seems highly likely that it will muddle through this rough patch and develop (or buy) new blockbuster drugs to sell. The worst-case scenario is likely a dividend cut, but even a 50% reduction would still leave the company with a well-above-market yield. If you can stomach some uncertainty, the risk versus reward balance here is likely tilted toward reward.

Reuben Gregg Brewer 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.