Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Pfizer Inc. (NYSE:PFE) is about to trade ex-dividend in the next three days. You can purchase shares before the 30th of July in order to receive the dividend, which the company will pay on the 1st of September.
Pfizer’s next dividend payment will be US$0.38 per share, on the back of last year when the company paid a total of US$1.52 to shareholders. Looking at the last 12 months of distributions, Pfizer has a trailing yield of approximately 4.0% on its current stock price of $37.66. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Pfizer paid out more than half (51%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 70% of its free cash flow as dividends, within the usual range for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we’re glad to see Pfizer’s earnings per share have risen 15% per annum over the last five years. Pfizer has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Pfizer has delivered an average of 9.0% per year annual increase in its dividend, based on the past 10 years of dividend payments. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is Pfizer worth buying for its dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That’s why we’re glad to see Pfizer’s earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow – 51% and 70% respectively. To summarise, Pfizer looks okay on this analysis, although it doesn’t appear a stand-out opportunity.
While it’s tempting to invest in Pfizer for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we’ve spotted 2 warning signs for Pfizer you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.