Beware This Biotech’s 6.3% Dividend Yield

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Editor’s Note: We’re doing something a little different for this week’s Safety Net.

We normally wouldn’t cover the same stock in The Value Meter and Safety Net within a week. But several of you asked us to evaluate Pfizer in both columns, so we thought it’d be valuable to take a look at it from both a value angle and a dividend angle.

Remember, a stock’s valuation and its dividend safety can be very different. Be sure to gather as much information as possible before buying a stock, and always consider which strategies are the best fit for you and your investing goals.

– Rachel Gearhart, Publisher

COVID-19 put a lot of companies in the spotlight.

Cruise companies like Carnival (NYSE: CCL) found themselves without any customers…

And tech companies like Zoom Video Communications (Nasdaq: ZM) and Teladoc Health (NYSE: TDOC) found a sudden windfall of cash…

But no company shined more than the vaccine makers Moderna (Nasdaq: MRNA) and Pfizer (NYSE: PFE).

Back in 2021, Marc covered Pfizer and gave it a fantastic dividend safety rating of “A.”

But that was back then. This is now.

As Director of Trading Anthony Summers showed you on Friday, Pfizer’s stock may no longer be the golden child it used to be for your portfolio.

Perhaps it’s a different story when it comes to Pfizer’s dividend, though. The company currently pays a quarterly dividend of $0.42, which equates to a very nice annual yield of 6.3%.

Is the dividend still as trustworthy as it was in 2021? Let’s dive into the numbers…

Pfizer’s stock had a particularly awful 2023, losing nearly half of its value.

Chart: Pfizer

Much of that decline was fueled by a massive drop in revenue.

And where there’s a drop in revenue, we’ll almost certainly see a drop in free cash flow.

In 2022, Pfizer’s free cash flow was $26 billion.

Fast-forward to 2023, and we see that it fell to only $4.8 billion.

Chart: Free Cash Flow Well Below Pre-COVID Levels

That’s an 81.6% drop in just one year. And it has me seeing red flags all over.

On top of that, the decline in free cash flow resulted in a 194% payout ratio for the company.

That’s well above our 75% threshold.

The culprit for Pfizer’s struggles is the decreased demand for COVID vaccines. Plain and simple.

In 2020, Pfizer’s cash from operations amounted to $14.4 billion.

The following year, that figure more than doubled to over $32.6 billion as the Pfizer COVID vaccine was approved and distributed.

The company also massively increased its capital expenditures to keep up with the booming demand.

But as demand dried up over the last few years, Pfizer was left holding the bag.

The only saving grace for this dividend is that it has risen in each of the last 15 years.

So it may not be the riskiest dividend I’ve reviewed in this column…

But it’s still far from safe.

Dividend Safety Rating: D

Dividend Grade Guide

If you have a stock whose dividend safety you’d like us to analyze, leave the ticker symbol in the comments section below.

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Also, keep in mind that Safety Net can analyze only individual stocks, not exchange-traded funds, mutual funds or closed-end funds.

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