Pfizer's Dividends Are Impotent without Sufficient Earnings

Pfizer's (PFE) recent acquisition of competitor Wyeth (WYE) was certainly a large one. The pharma giant paid $68B, but at the same time the maker of Viagara couldn't keep it up as their dividend went limp when they chopped it by 50%. Not quite the disappearing dividend act that many US banks, including B of A (BAC), have pulled, but size ultimately mattered as Pfizer needed the cash and just wasn't producing the earnings growth to back the payment.

I am by no means a perfect stock picker, and time will tell if I am even an adequate one, however my stock evaluation process weeded Pfizer out early. Pfizer/Wyeth could turn out to be a fabulous long term investment, however when I looked at Pfizer's merit as an investment over the last two years I stayed away basically for this reason:

Pfizer's Earnings Per Share Over The Last 4 Years

• 2004 EPS = $1.44
• 2005 EPS = $1.03
• 2006 EPS = $1.51
• 2007 EPS = $1.18
• 2008 EPS = $1.19

This is basically no growth in earnings over the past years. This is not good. One of the first trends that I want to see when analyzing a potential dividend investment is a trend of growing earnings with maybe a few blips. Consistency and modest growth are ideal. At the same time look how Pfizer was compensating shareholders during this time by increasing the dividend, which importantly was not backed by earnings growth.

Dividends Per Share Over The Past 4 Years

• 2004 = $0.68
• 2005 = $0.76
• 2006 = $0.96
• 2007 = $1.16
• 2008 = $1.28

2009's dividend pay out ratio was actually around 97% according to Globeinvestor.com. So while earnings were trying to keep their head above water, the company was raising dividends at a compounded rate of about 17%.

Whether management would have cut the dividend if not for the Wyeth purchase is beside the point. The trend was not your friend as an investor in Pfizer. While it is nice to receive an ever increasing dividend, the earnings per share trend must be in tact to back the dividend up. Failure to provide a solid earnings trend will lead to an impotent dividend.

Comments

[Football Geek]

Yes, I agree
I knew something was up when they did'nt raise it in 2008

2009 Jan 28 03:26 PM