Is Pfizer's 6.8%-Yielding Dividend Too Good to Be True?

Key Points

• Pfizer's payout ratio is around 90% of earnings, which is high for a dividend stock.

• It reported strong operational growth of 10% in its most recent quarter.

• The company continues to focus on cutting costs to improve overall profitability.

• 10 stocks we like better than Pfizer ›

Finding a high-yielding stock that is safe to hang on to can be a rarity. When yields get high (e.g., more than 5%), usually there's a reason behind it. And investors are often hesitant to invest in such stocks, fearing that those incredibly attractive payouts may not end up being sustainable.

One of the highest yields you can get right now is from Pfizer (NYSE: PFE). The healthcare giant offers a yield of 6.8%, which is more than five times what the average rate is for the typical stock on the S&P 500 -- just 1.2%.

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Could Pfizer be one of the best dividend stocks to add to your portfolio right now, or is its yield too good to be true?

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Is Pfizer's high payout ratio a concern?

A common metric to rely on when evaluating the safety of a dividend stock is its payout ratio. This tells you how much of a company's earnings are being paid out in the form of dividends. The higher it is, the more unsustainable the payout potentially is. Pfizer's payout ratio is currently around 90%, which suggests there isn't a big buffer in its bottom line.

However, that number is skewed due to Pfizer's year-end results. In the last three months of 2024, the company incurred billions in asset impairment charges, restructuring expenses, and other non-cash items, which weighed down its earnings. And since the payout ratio looks at a company's earnings over the past 12 months, all it takes is one bad quarter to weigh it down.

This is where relying on cash flow can be a better indicator of how healthy a dividend really is. In the trailing 12 months, Pfizer's free cash flow totaled $12.4 billion, which is far higher than the $9.6 billion it paid out in dividends over the past year. This implies the dividend is indeed safe.

Recent results suggest the company is going in the right direction

As of the end of last week, Pfizer's stock price is down 5% year to date, despite it already taking a beating in previous years. Investors remain concerned about not only its dividend, but also its growth potential.

Pfizer is working to reduce costs while also growing its operations. Acquisitions, including its massive $43 billion purchase of oncology company Seagen in 2023, opened up new doors and opportunities for the business that look to be paying off.

In its most recent quarter, which ended on June 29, the company reported year-over-year revenue growth of 10%, with sales topping $14.7 billion. Meanwhile, the company continues to reduce costs as it adapts to declining demand for its COVID-19 vaccine and pill. Its diluted earnings per share this past quarter totaled $0.51 -- higher than the rate of its quarterly dividend payment ($0.43).

Pfizer's dividend looks safe, and the stock still looks cheap

From looking at its financials, there aren't any glaring concerns to suggest that Pfizer's dividend is in trouble. I believe investors are being overly cautious with the stock. And with Pfizer focusing on cost reduction while also still growing its business, it's a top income-generating investment you can own for the long haul. It's currently trading at a price-to-earnings multiple of just 13, making it a fairly cheap stock to own.

There are risks for many healthcare companies these days as healthcare reform may impact future profitability, but that can be difficult to predict and forecast. Pfizer is doing an excellent job of managing what it can control, and it's among the best stocks to buy in the healthcare sector.

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David Jagielski 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.