Pfizer Inc. (PFE): Big Things Are Happening at This Pharmaceutical Company

Without the effect of these buybacks, Pfizer wouldn’t look all that attractive as a dividend stock, mainly because earnings growth will likely be slow. But, the buybacks will allow the company to raise the dividend faster than earnings growth without increasing the payout ratio. And with a fairly low payout ratio, there’s room for dividend growth on that front as well.

Better than its peers

Merck & Co., Inc. (NYSE:MRK), with its high payout ratio and much less aggressive buyback program, would be unable to grow its dividend at a very fast rate. The most recent increase last year was just 2.4%, and I think that’s about what the typical dividend increase will look like in the future. The yield is a bit higher than Pfizer Inc. (NYSE:PFE) at 3.53%, but the minuscule growth kills it as a dividend growth stock.

Eli Lilly & Co. (NYSE:LLY) looks a bit better at first, with a 3.77% dividend yield and a lower payout ratio than Merck & Co., Inc. (NYSE:MRK). But, Eli Lily hasn’t raised its dividend since 2009 and has no share buyback program to speak of. What’s worse, Eli Lilly & Co. (NYSE:LLY) faces a steep patent cliff as its most important drugs will soon be open to generic competition. It’s unlikely that we’ll see a dividend increase anytime soon, and there may even be a dividend cut. Best to avoid this one.

The bottom line

What makes Pfizer Inc. (NYSE:PFE) the best choice is its aggressive buyback program funded by a strong cash flow and selling off non-core assets. I expect these massive buybacks to continue and the dividend to continue to grow at a reasonable rate given the yield. There’s also been talk of Pfizer spinning off its generic drug business and becoming a pure-play drug maker. This would raise Pfizer’s margins and likely lead to a higher valuation. Pfizer is an interesting stock and a solid dividend play. It’s definitely on my radar.

The article Big Things Are Happening at This Pharmaceutical Company originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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