Is Pfizer's 6.9%-Yielding Dividend Still Safe?

Healthcare giant Pfizer (NYSE: PFE) has been offering a high yield for some time. But that hasn't been enough to get investors to buy up the stock. You can see that in its sluggish share price, and also in the fact that the dividend still yields an incredibly high amount at 6.9%. That's nearly six times the S&P 500 average of 1.2%.

Investors are clearly having doubts about the dividend, and perhaps the company as well. If they weren't, then clearly it would be a steal of a deal, the stock would take off, and the yield would come down. If investors aren't touching a stock, there's usually some nagging concern about it.

Below, I'll look at whether Pfizer's dividend is safe and whether it could be a reliable income stock to own right now.

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Pfizer's profits declined by double digits last quarter

In its third-quarter results, Pfizer reported earnings per share of $0.62, down 20% from $0.78 in the prior-year period. Meanwhile, the company has been paying $0.43 per share in dividends each quarter. Based on this most recent quarter, that would put its payout ratio at just under 70%, which is a fairly healthy percentage.

The good news is that if Pfizer is able to maintain its current level of profitability and its earnings don't deteriorate further, the dividend should remain safe and secure.

It's generated more than $10 billion in free cash flow over the past 12 months

Another way to evaluate the dividend is to look at free cash flow, which tells you how much cash the company is generating and how much is left over after factoring in both day-to-day operating expenses and capital expenditures.

Since cash flow can fluctuate over time, depending on the collection of receivables and the payment of invoices, examining multiple periods may be ideal in this situation. And over the trailing 12 months, Pfizer's free cash flow has totaled $10.4 billion, which is more than the $9.7 billion it paid out in dividends during that time frame.

While the buffer doesn't seem nearly as comfortable when looking at cash flow, there are no glaring signs to suggest that Pfizer's payout is in trouble.

Why is the stock struggling?

With strong enough financials to support its current payout, and potential room for another rate hike in the near future, you may be wondering why the stock can't seem to get much momentum. This year, shares of Pfizer are down nearly 6%, and over the past three years, they've lost close to half of their value.

Investors are clearly worried about Pfizer's future. The company is a few years removed from hitting record-breaking sales due to its COVID-19 products, and it's now struggling to generate any meaningful growth at all (its top line was down 6% this past quarter).

That may not seem like a problem for the dividend, but it could be. If the company's earnings worsen due to upcoming patent cliffs, its payout ratio suddenly won't look so great. And if it needs more cash to pursue acquisitions in order to bolster its growth prospects, one way to do that may be to reduce its dividend. Though neither may ultimately happen, those are a couple of possibilities that may be weighing on investors' minds right now.

Though Pfizer may seem to offer a solid dividend today, if investors have question marks about the company's future, then it's entirely reasonable to expect they'll also have doubts about the safety of the payout in the long run.

Is Pfizer's stock an underrated buy?

Pfizer has been acquiring companies to shore up its business, and while those moves can take some time to pay off, I believe they'll come through with more blockbuster drugs to reenergize the company's top and bottom lines. Pfizer already has a promising pipeline that features around 100 drug candidates. It doesn't need all of them to be successful; even just one or two really big wins could be what gets investors excited about the stock again.

For now, the dividend is safe, and taking a position in Pfizer while its valuation remains low may not be a bad idea. While there is some risk with the stock, I believe the market is being overly cautious, as Pfizer is trading at a forward price-to-earnings multiple of just 8. Arguably, one of the leading pharma companies in the world should trade at a far higher valuation than that. It may take a while before the stock gets going, but when it does, it could take off given how cheap it is today.

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.