Was Pfizer’s Dividend Cut Really Necessary?
- April 27, 2009
- Dow Dividend Stocks, Featured, High Yield Dividend Stocks
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Last week, Pfizer (PFE: 14.81 +2.14%) slashed their quarterly dividend by 50% - reducing their quarterly cash dividend from $.32 per share to $.16 per share. In the process, they reduced their annual dividend yield from 9.7% to 4.9%.
While a 4.9% dividend yield is still quite good, the real issue is whether or not Pfizer needed to cut the dividend at all.
Wall Street expects Pfizer to earn $1.95 per share this year and to increase their EPS 18% to $2.30 next year. At their previous dividend payout level, Pfizer would have only paid out 66% of their projected 2009 earnings. Assuming the dividend would have remained constant in 2010, the dividend payout ratio would have fallen to 56% next year. So clearly the company had sufficient earnings to continue funding their quarterly dividends.
The official company logic for cutting the dividend is to apply the savings towards their purchase of Wyeth (WYE: 50.39 0.00%). Pfizer has agreed to purchase Wyeth for $62 billion. However, the anticipated savings from the dividend cut is only a little over $1 billion per quarter. So the savings from the dividend cut will hardly have a significant impact on the company’s $62 billion purchase of Wyeth.
Meanwhile, Pfizer’s long-suffering investors continue to suffer. It seems these days that Pfizer’s high dividend yield was the only thing investors had going for them and now even that has been slashed in half.
So far this year, Pfizer’s stock price has fallen over 24%. That’s following declines of 15% in 2008 and 19% in 2007. In fact, Pfizer’s stock have fallen more than 13% in four out of the last five years. Going back to 2001, the stock has only had two years of positive gains (16% in 2003 and 11% in 2006). Since 2000, Pfizer’s stock price has fallen 59%. Adjusting for dividends cushions the blow a little bit, but Pfizer’s shareholders have still lost 47% since 2001.
So with their stock price continuing to fall did Pfizer really do the right thing by cutting its high dividend yield?
