Here's Exactly Why I'm Not Afraid of Pfizer's 6% Dividend Yield

Have you ever heard the expression "if it sounds too good to be true, it probably is"? It's an admittedly fair assessment of many offers and prospects, including prospective investments.

It's not always the case, however. Sometimes, things are exactly how they seem on the surface, and the crowd is simply ignoring an opportunity, assuming there's a catch to the apparent upside.

I think that's what's going on with drugmaker Pfizer (NYSE: PFE) of late. Shares of the pharmaceutical outfit have underperformed since late 2021, peaking that year and still down by more than half of that high, pumping up their forward-looking dividend yield to an enticing 6%.

It's a sign that confidence in the company's future is low, perhaps reflecting worries about the impending expirations of patents on its cancer-fighting Ibrance, blood thinner Eliquis, and pneumonia vaccine Prevnar 13. It's a collective threat to Pfizer's bottom line.

But investors are looking right past the organization's (very) promising longer-term pivot.

Out with the old, in with the new

As it stands, roughly one-third of Pfizer's revenue is subject to patent expirations over the next couple of years. It's nothing to dismiss. Largely lost in the matter, however, is how much this pharmaceutical giant has done to prepare for this eventuality.

Image source: Getty Images.

The acquisition of Seagen back in 2023 was one of these preparatory moves, bolstering its cancer drug portfolio. That's certainly not the only strategic move it's made, though. In 2022, Pfizer acquired Arena Pharmaceuticals, Biohaven Pharmaceuticals, and Global Blood Therapeutics, then scooped up Metsera last year to better penetrate the weight-loss space.

The company has also committed 40% of its internal research and development budget to create new cancer treatments, adding to what Seagen brings to the table as part of a more sweeping aim of bringing eight breakthrough oncology drugs to the market by 2030.

Its ultimate goal? To double the number of cancer patients it currently serves by 2030, making Pfizer one of the bigger names in the oncology business, which Precedence Research says is currently worth $280 billion per year and set to grow at an average rate of more than 11% per year through 2035.

To this end, CEO Albert Bourla's expectation "that starting in 2029, we will enter five years of high-single-digit revenue CAGR [compound annual growth rate]" led by the company's cancer push may be conservative, even if not thrilling. It's certainly enough to keep the dividend payments flowing.

Worth the likely bumpy ride

The tough part here is the in-between. Although Pfizer is winning approvals for new drugs like June's FDA approval of Hympavzi (for hemophilia) and will certainly win more approvals in the meantime, the next two to three years could seem slow as some of its portfolio loses patent protection without being immediately offset by the introduction of new drugs. Shares could struggle as a result, even if the dividend remains reasonably well protected.

I've got a feeling, however, that the market is going to start connecting these dots sooner than later, rewarding this stock for the incremental progress the company is making toward its longer-term vision. The sizable dividend yield you'd be plugging into in the meantime makes it even easier to make that bet.

James Brumley 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.