How Safe is the Pfizer (PFE) Dividend?

70% of pharma giant Pfizer's (PFE) revenue is losing patent protection in the next five years. What does this mean for the dividend, which currently yields 4.2%?

The pharmaceutical industry has long been associated with strong dividends, large cash piles and cures for all mankind’s chronic ailments. The lure of annuity revenue streams protected by patents, huge cash piles and ever improving products makes dividend seeking investors one of the biggest holders of pharma stocks, as a group.
One pharma giant currently yielding over 4% in dividends is Pfizer (PFE). Pfizer is a research-based, global biopharmaceutical company. The Company applies science and its global resources to improve health and well-being at every stage of life. Pfizer's diversified global health care portfolio includes human and animal biologic and small molecule medicines and vaccines, as well as nutritional products and many consumer health care products. Pfizer is the world’s largest drug company by sales ($50 billion in 2009) and Lipitor is the company’s best selling drug.
Last year the company completed the acquisition of Wyeth for $68 billion in cash, shares and debt.
On a valuation basis Pfizer (PFE) is attractive. The company is trading at a 12 times PE ratio, a price to book of 1.5 and a price to cash flow of 10. Pfizer also has less debt than its peers. However the company is not very effective: the return on equity is at only 11%, way below the industry average of 26%, and return on assets and return on investment are both half the figures achieved by competitors, at 5% and 6% respectively. This suggests that on its $7.7 billion R&D expense (15% of revenues), Pfizer (PFE) is earning a paltry 6%. That’s less than the dividend yield on Reynolds American.
In a Reuters forecast of top selling drugs by the year 2014, Pfizer appeared just once, for an arthritis drug called Enbrel, jointly developed with Amgen (AMGN). The Reuters poll believes that drug to generate sales of $8 billion in 2014. That same list originally forecast Lipitor and Enbrel to be top selling drugs with a combined market of $18.8 billion in 2010, which was largely accurate. On this crude measure, that represents a 57% drop in top ten selling drugs for Pfizer (PFE).
The major concern with Pfizer (PFE) really is the fact that a large part of the company’s revenues are going to lose patent protection (many already have), and the company will be unable to sustain earnings and therefore dividends over the medium to long term, without undergoing expensive acquisitions. Lipitor, which makes up a quarter of the company’s revenues, comes off patent next year. Generic drug companies will stage a run on at least 14 Pfizer (PFE) patents, which make up about 70% of the company’s sales, over the next five years.
A Wall Street Journal article said, “New innovation is funded by previous innovation, but the money sunk over the last decade into the search for the next big lifestyle blockbuster a la Lipitor also doesn't have much to show for it. The industry is thus turning away from such ‘small molecule’ drugs and toward advanced biotechnology. Biomedicines are made by splicing genetic material into living cell cultures, and they often target rare diseases and unmet needs like cancer and Alzheimer's.” This in turn creates uncertainty. On top of that, the new Health Care Bill has introduced a whole host of new uncertainties and unknowable factors into the equation, making it very hard to predict what Pfizer will generate in earnings five years out.
Investors who are concerned chiefly with the return of capital and a safe dividend would be well advised to thoroughly research Pfizer before committing money for the dividend alone long-term. Pfizer makes for an interesting contrarian play, but if you’re looking for income it’s probably safer to look elsewhere.
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