Pfizer's Dividend Yield Is One of the Highest in the S&P 500. Here's Why the Dividend Is Safer Than It Might Seem

The S&P 500 is full of quality dividend stocks. But is Pfizer (NYSE: PFE) one of them? On the one hand, the drugmaker has one of the highest yields in the index. However, some would point out that Pfizer has faced significant challenges and still has important ones on the horizon. Still, in my view, Pfizer is an attractive income stock to buy and hold. Here's why the dividend is safer than it appears at first.

Recent financial results have exceeded estimates

Reduced demand for coronavirus products has affected Pfizer's financial results in recent years. In the second quarter, the company's COVID-19 vaccine, Comirnaty, reported $261 million in sales, down 32% year over year. Pfizer's coronavirus medicine, Paxlovid, performed even worse. The drug posted only $21 million in revenue, down 95% compared to the year-ago period.

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Despite that, Pfizer's total revenue climbed by 3% year over year to about $15 billion. As management has pointed out, the company has exceeded revenue expectations in nine out of the past 10 quarters, and it beat earnings estimates in all 10 of them. True, Pfizer is racing toward important patent cliffs, including that of Eliquis, an anticoagulant, its best-selling medicine.

Eliquis will lose its U.S. patent by the end of the decade. Two other drugs facing patent-exclusivity losses are Ibrance and Xtandi, both of which are cancer drugs. Still, Pfizer's newer and acquired products will help the company overcome this challenge. CEO Albert Bourla noted that these products generate $13 billion in annualized sales and are growing 20% year over year.

Suppose these medicines grow at a compound rate of 15% through the next four years. Their annualized revenue would get to $22.7 billion by 2030. As of the first half of the year, Ibrance, Xtandi, and Eliquis have combined annualized sales of $15.27 billion. That will certainly grow meaningfully before they hit their patent cliffs, and it's not as if their revenue will immediately drop to zero following their loss of patent exclusivity. Does that mean the new (and acquired) products will more than offset the loss-of-exclusivity products? Probably not.

But Pfizer is preparing for this challenge better than some investors realize. We can also look at the work it has done to increase profits. The company eliminated $7.2 billion from its cost base in the past three years. That's a meaningful amount, and future cost-cutting measures could also positively impact the drugmaker's results and help it navigate the difficult period it is entering.

Pipeline progress is key

Is Pfizer's dividend program -- which boasts a juicy 5.8% forward yield -- in trouble as the company faces several patent cliffs? Probably not. Here are two reasons why. First, Pfizer hasn't reduced its dividend in recent years, despite the challenges it has faced. The past isn't a guarantee of the future, but recent history suggests that management prioritizes returning capital to shareholders through dividends.

In the past five years, the company has increased its payouts by 10.26%. That's not extraordinary, but given the challenges it has faced, it's still fairly impressive. Second, beyond recent brand-new approvals, Pfizer boasts a deep pipeline that should help the company significantly expand its lineup of approved products over the next few years.

This is where even stronger growth could come from, especially since Pfizer boasts several highly promising candidates. For instance, the company's investigational long-acting GLP-1 weight-loss medicine, berobenatide, could eventually generate well over $1 billion in sales, given its monthly dosing schedule, strong tolerability, and the predicted rapid growth of the anti-obesity market.

That's just one of the more notable products in Pfizer's pipeline. Of course, the company could face clinical setbacks. But Pfizer's pipeline is deep: It boasts some 16 brand-new products in Phase 3 studies. That's not including earlier-stage programs. Even a modest Phase 3 success rate of 50% -- which is well in line with the industry average -- will lead to a good number of brand-new products over the next few years. These are all good reasons why Pfizer's outlook appears fairly strong, and the dividend looks safe, despite recent headwinds.

Prosper Junior Bakiny 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.