Dividend Growth Analysis
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Pfizer’s Dividend Growth Score is 52, which indicates that Pfizer has about average dividend growth potential.
While not a dividend aristocrat, long-term investors have been handsomely rewarded from holding Pfizer stock even despite the 2009 cut.
The dividend has increased at nearly a 10% CAGR over the last 20 years and a 4% CAGR over the last 10 years, which still easily outpaces inflation.
Source: Simply Safe Dividends
Unlike some other global pharmaceutical executives such as Eli Lilly and Co (NYSE:LLY) (see our analysis of Lilly here) Pfizer’s management team doesn’t talk about their expectations for dividend increases. However, they still do have a focus on making sure they have an appropriate capital return strategy that includes dividends.
Ian Read, Pfizer’s Chairman and CEO, discussed his view on the second quarter earnings call on managing the company’s cash flows in the event they chose to split up the company (which they elected not to do):
“And clearly if you’re in two distinct divisions, you don’t have the same opportunities of deployment of cash, if you’re in two companies as you do if you’re one. You have less choices as to in which areas you put it. When you’re one company, you can take those cash flows, return them to shareholders, continue to invest in the area of business, pay your dividend, or do business development in the essential business.”
Source: Seeking Alpha
So while the management team doesn’t openly discuss their expectations for dividend increases, the dividend is top of mind when thinking about allocating the company’s cash flow.
Given the variety of factors impacting the business, it is very difficult to forecast an accurate dividend growth rate on a go forward basis. With that said, we can look at a few areas to give us a better idea of what a ballpark growth rate could look like.
If the recent past is any indicator, then investors can expect the dividend to grow in the high single digits, similar to the past three years of growth.
Furthermore, current consensus EPS forecasts project annual earnings growth of 7-8% over the next couple of years (not including the Medivation acquisition). If Pfizer maintains the current payout ratio in line with the peers, then it seems reasonable to expect the dividend to grow in proportion to the EPS growth.
Considering all of these factors, over the next few year investors should expect the dividend to outpace inflation at a minimum with additional upside if key therapeutics in the pipeline prove to be successful.
Valuation
Pfizer Inc. (NYSE:PFE) currently trades at around 13.4x 2016 earnings estimates and offers a 3.6% dividend yield, which is slightly higher than the stock’s five-year average dividend yield of 3.4%.
The business is very stable given the recession-resistant nature of Pfizer’s end markets. However, the business has two main risks associated with it.
The first risk is that they can’t internally develop enough new drugs to offset the recent and upcoming patent expirations in their current portfolio.
Secondly, they have made a number of acquisitions at large premiums to try to replenish the pipeline. If the drugs they acquire in these acquisitions are not a success, then they will have impaired a significant amount of capital while not doing anything to improve the business. We think this is a low probability event and, in all likelihood, the business should be able to perform well.
Given the reasonable P/E ratio and anticipated growth, Pfizer investors could be poised to generate a high-single digit to low-double digit annual total return.
