Another key business characteristic that leads to Pfizer’s safe dividend is its recession resistant business model. While it can be very expensive to internally research, develop, run clinical trials, and ultimately commercialize a new drug, they can enjoy years of monopoly status with a product that should have extremely stable to growing demand.
This dynamic leads to a very stable margin structure and predictable cash flow to fund the dividend.
Source: Simply Safe Dividends
The last key component driving a better than average Dividend Safety Score is Pfizer’s solid balance sheet. As of July 3rd, Pfizer had cash and short-term investments of nearly $21 billion on the balance sheet.
To illustrate how large this is relative to the dividend, they could continue to fund the dividend at the 2016 run rate of roughly $7.35 billion for nearly three years with this cash.
Offsetting the cash is gross debt of around $44 billion dollars. This implies they had net debt of about $23 billion dollars and a very safe net debt/EBIT (earnings before interest and taxes) ratio of 0.8x.
However, the Medivation acquisition occurred after the end of the second quarter, so the balance sheet doesn’t reflect its impact. Management plans to finance the $14 billion transaction through cash on hand. This lowers Pfizer’s cash from roughly $21 billion to around $7 billion.
Even when making the adjustments for the acquisition, Pfizer’s balance sheet is still very strong and should not be a source of risk for a dividend cut. The company also maintains solid investment-grade credit ratings on its debt.
Overall, dividend investors should sleep well at night knowing that Pfizer has relatively modest payout ratios, a very stable business model serving non-cyclical end markets, and a healthy balance sheet.
Nevertheless, it is conceivable (albeit very unlikely) that a repeat of the 2009 dividend cut could happen again where the quarterly dividend payout was reduced substantially.
Source: Simply Safe Dividends
In early 2009, Pfizer announced that it was acquiring its U.S. rival Wyeth for roughly $68 billion dollars. The strategic rationale for the deal was to help Pfizer offset the expected revenue decline from the upcoming patent cliff in 2011, which included the blockbuster drug Lipitor.
Dividend cuts like this are difficult to predict because it has to do with management’s capital allocation decisions rather than the underlying payout ratios, business fundamentals, and balance sheet.
With that said, astute investors could have anticipated management’s decision by understanding that the company would need to make a large acquisition to insulate itself from the patent cliff.
Today’s situation isn’t as dire as it was back in 2009, and it looks like Pfizer has already made their large acquisitions to rebuild the pipeline and drive incremental growth.
Furthermore, Pfizer recently decided to not breakup into multiple companies and will continue to operate as one company.
While the future is unknowable and difficult to forecast, we would be surprised if management made a large capital allocation decision that would force a dividend cut.
