Pharmaceutical Company Pfizer Dividend Growth Investing Results

Summary

• Pharmaceutical giant Pfizer and its German partner BioNTech have earned much news lately due to their successful warp speed COVID-19 vaccine development.
• This article updates my 2016 article on the PFE holding I initiated in 2001.
• I am committed to dividend growth investing (DGI) and started PFE acquisitions two decades ago because its dividend growth record appealed to me.
• PFE’s long-term dividend growth has been consistent except for an unexpected one-time 50 percent dividend rate cut in 2009.
• Despite the cut, dividend rate raises and reinvestment have boosted my PFE dividend payout growth and enabled cumulative dividends to approach my original purchase cost.

Photo by Jeenah Moon/Getty Images News via Getty Images

The Acquisition History and Rationale

In 2001, I bought an initial block of 100 shares of Pfizer (NYSE:PFE), a large pharmaceutical company, for $37.50 per share. It was one of the first individual stocks I ever bought after decades of mutual fund investing. I was attracted to what I believed was a reasonable price, an impressive earnings record, high profits from blockbuster drugs, the pharmaceutical industry's growth, and PFE's strong growing dividend. In the previous decade, the dividend rate had quadrupled and the 25-year dividend compound annual growth rate (CAGR) was over 13.5 percent. But in 2001, PFE resembled a "growth" stock as much as a "dividend" stock, yielding only 1.4 percent.

After that first purchase, the price of PFE began to drop. Since I was convinced of the long-term viability of the company, I ignored the paper loss of my original shares and "doubled down" by purchasing more shares in a contrarian move. I ultimately acquired a total of 700 shares on E*TRADE according to this purchase history (transaction fees omitted):

Date	Shares	Price/Sh	Total $
9/7/2001	100	$37.50	$3,750.00
8/26/2002	100	$34.00	$3,400.00
9/6/2002	100	$31.25	$3,125.00
9/13/2002	100	$29.75	$2,975.00
2/5/2003	100	$29.75	$2,975.00
10/15/2004	100	$29.00	$2,900.00
12/17/2004	100	$23.52	$2,352.00
	====		=========
Total Acquisition	700 shares		$21,477.00

Click to enlarge

I believe the market's pessimism centered on the looming loss of patent protection for Pfizer's blockbuster drugs such as Lipitor and Viagra. However, I had faith in the company's new drug development pipeline and management's ability to compensate for lost revenues.

The total 700 share purchase had a $30.68 average price per share, 18 percent lower than the initial purchase price of $37.50. The last purchase for $23.52 was 37 percent below the first purchase. The seven block purchases constituted what some call an "averaging-down" action, which requires a strong conviction about a stock's quality in the face of negative market sentiment. Investors doing this must believe in this concept - If a stock is good enough to purchase at one price, it's certainly good enough to purchase additional shares at a lower price.

That mindset requires discipline. Many investors inherently dislike a shrinking stock price after purchasing a stock. Conversely, when the price goes up, many people are happy. But for some, when the price goes down, they see a buying opportunity. The investor must conclude that the market's rationale for a sinking price will ultimately be overcome by management action and/or market recognition that the perceived problems are surmountable and/or not serious. I believe this is the classic "contrarian" or "value" approach to investing.

This brings to mind the famous Warren Buffett quote:

"Be fearful when others are greedy and greedy when others are fearful."

The DRIP Approach to Dividends

Since Pfizer paid a dividend, the first quarterly dividend was a grand total of $13, based on 100 shares owned at the time and the quarterly dividend rate of $0.13 per share. Dividend growth continued as I acquired 600 more shares and PFE raised its dividend rate annually. In fact, the quarterly dividend rate per share grew from $0.13 to $0.32 from March of 2002 to March of 2009. That equates to a 13.73 percent CAGR, which is very nice. However, I did not reinvest the early dividends into more PFE shares. Instead, I retained the cash for use elsewhere.

During the first two years of ownership, I favored stocks with growing dividends and I began learning about dividend reinvestment. After taking cash for the early PFE dividends, I activated E*TRADE's dividend reinvestment program (DRIP) in time for the December 2003 dividend. Since then, all quarterly dividends have acquired additional shares and DRIP remains activated.

My objective is dividend growth investing (DGI). And I desire dividend growth to exceed inflation to boost buying power. The concept of "compounding" makes DGI grow dividends faster overall. Dividend growth compounding occurs two primary ways:

• Dividends grow when a company raises its quarterly dividend rate per share. Typically, solid dividend-paying companies raise dividend rates one time per year. Compare the behavior of constant slowly rising dividend rates to stock prices fluctuating every minute.

• By activating DRIP, dividend payouts grow even faster because every dividend purchases more shares. Every payout exceeds the previous one due to more shares.

My E*TRADE account charges no transaction fee for dividend reinvestment. This nice feature enables quarterly share count increases with zero "frictional costs". Over time, the DRIP compounding of share count, coupled with PFE dividend rate increases, provided a quarterly payout of $273.50 in March 2009. I was very pleased with the dividend growth. I became a dividend growth investor who appreciated the compounding of both rate raises and DRIP.

The Bottom Falls Out

After the March 2009 record-high dividend of $273.50, I was surprised, disappointed and concerned to see Pfizer cut the next dividend rate in half, from $0.32 to $0.16 per share per quarter. That cut drove down my next dividend payout in June 2009 to $140.43. In addition, the years 2007 through 2009 saw Pfizer's share price literally "fall through the floor".

The Financial Crisis was at its depth in 2009, but I don't believe Pfizer cut the dividend due to the poor economy. In researching what happened, I learned that Pfizer was making a huge acquisition of Wyeth, a 149-year-old pharmaceutical giant. A description of that transaction is excerpted from this Wikipedia article:

"On January 23, 2009, The Wall Street Journal reported that Pfizer was in talks to buy Wyeth at a cost of US$68 billion. On January 25, Pfizer agreed to the purchase, a deal financed with cash, shares and loans. The deal was completed on October 15, 2009."

The bottom line is that Pfizer needed cash to pay for the huge acquisition. Some of that cash came from a 50 percent reduction in the dividend rate.

By implementing an "unthinkable" dividend cut, Pfizer used the extra cash to facilitate a strategic purchase. Like many stocks during the 2009 Financial Crisis, PFE dramatically dropped to the $12-13 range. This aggravated Pfizer's ability to acquire Wyeth using Pfizer stock and resulted in a huge 60 percent "paper loss" from my $30.68 average purchase price.

I swallowed my disappointment and became convinced that I should hold on and continue with DRIP. One reason was that, despite the 50 percent dividend rate cut, a much lower share price still allowed share accumulation at a very nice clip. Since then, DRIP has added new PFE shares to the tune of 8-15 shares every single quarter. Therefore, the original purchase of 700 shares has almost doubled to a total of 1,372.97262 shares as of the 03/05/2021 dividend.

Specific market segments may have different product risks than other market segments. Some are more cyclical than others. The Pfizer investment taught me that pharmaceutical companies may have lower risk since many people buy medications regardless of the economy. However, many of these companies have higher risk due to patent expirations of their most popular pharmaceutical products. Patented products generally sell at higher prices until the patent(s) expire. Consequently, these companies experience patent expiration risk which may cause lower stock prices. They resemble some high-tech companies whose products lose patent protection or competitive status due to new inventions and developments by other companies.

A "Loser" Stock Price Performance

As of market close on 03/31/2021, PFE price was $36.23, which is 18.1 percent higher than my $30.68 average purchase price of 700 shares. Therefore, considering only the share price, that price gain over the time of the full 700 share ownership is positive but definitely mediocre. PFE price only grew by 1.03 percent CAGR above my average price during the 16.25 years since December 2004. Based on price alone, this is not a very impressive way to accumulate a reasonably growing nest egg, especially considering inflation.

The following chart depicts the price story. Over the two decades since late 2001, Pfizer's share price has struggled to barely break even. Fortunately, however, due to the seven 100-share purchases (the "average-down" action), my average purchase price of $30.68 is lower than the 03/31/2021 market price of $36.23. But the market's tepid 2020 price response is baffling. During that time, Pfizer beat the world with a successful COVID-19 vaccine in record time and is now producing it by the millions. Why was that not a huge boost for the stock price?

But remember, I am a dividend growth investor. Price is not the only consideration. In fact, income is my primary goal and a low price is actually somewhat beneficial due to DRIP. A focus on share price alone ignores my primary objective - growing dividends.

A Dramatic Dividend Rate Cut

Pfizer's dividend rate performance is not what a dividend growth investor wants to see. Dividend rate growth lasting several decades gives confidence in a company's firm commitment to dividends. Pfizer upheld that impressive record for years until 2009. But despite Pfizer's disappointing dividend cut, my investment has still grown total dividend income substantially. I believe Pfizer did what it had to do to compensate for blockbuster drug patent expirations - acquire Wyeth to grow its business.

The following chart depicts the setback suffered by Pfizer dividend investors in June 2009: a 50 percent dividend rate cut. There was a small warning for observant investors - the March 2009 payout was the fifth quarter at the $0.32 rate. This was the first year after many years that Pfizer had not raised its rate after four quarterly payouts. No investor wants to see this happen to a dividend growth holding.

But this chart depicts some very good news. Both before and after the 2009 rate cut, Pfizer's management demonstrated a strong, disciplined and continuing commitment to dividend growth. Dividend raises do not happen by accident. In fact, the board of directors authorizes them.

I considered exiting Pfizer at the time but concluded the disappointing dividend cut was somewhat justified. The cut raised cash for an important acquisition, rather than a bailout for a poorly run company. I also decided not to sell because I would have incurred a huge capital loss (at the time, PFE price was about $15) as well as termination of all future dividends.

These dividend rate numbers reflect the Pfizer dividend experience. In 2002, the PFE dividend rate was $0.13 per share per quarter. Just before the 50 percent dividend cut in 2009, the rate was $0.32 per share per quarter. After the cut, it went down to $0.16, then began a steady rise. Today it stands at $0.39, which is above the $0.32 in 2009 before the cut.

Note - Since the cut, Pfizer has raised the dividend rate like clockwork every four quarters. The increased payouts start every year with the first quarterly dividend in March.

Share Count Growth Never Stopped

Due to DRIP, my PFE share count never stopped growing every quarter, despite the 50 percent dividend rate cut. And the depressed prices boosted reinvestment share count purchases. As of the last dividend on 03/05/2021, share count had swelled to 1,372.97262 shares versus the original purchase of 700 shares. That represents a share count gain of 96.1 percent.

I view the extra 672.97262 shares from dividend reinvestment as essentially "free" (no new capital required). Others might not view it this way, because the dividends could have been used to purchase other stock(s). However, other stocks might have performed either better or worse. My thought was that DRIP was making excellent buys at the depressed PFE prices. And purchase of other stocks would mean a lengthy delay of at least 1-2 years to accumulate adequate cash for a purchase. DRIP reinvestments go to work immediately to generate higher dividend payouts. And PFE's disciplined dividend rate growth greatly appeals to me.

DRIP buys small incremental share counts every single quarter with zero transaction fees. The dividend cash "dollar cost averages" the share prices. Since the seventh purchase of 100 shares in December 2004, DRIP has compounded my PFE share count at 4.23 percent CAGR for 16.25 years. Share count has grown in a nearly straight line, despite the 50 percent rate cut. This chart is truly a thing of beauty.

Market Value

The total original purchase cost for 700 shares was $21,477.00 excluding transaction fees. Today, E*TRADE stock trade commissions are zero. Internet brokerages have made trading much cheaper.

So, how has the total PFE investment performed? From a stock price aspect, it has performed minimally with an 18.1 percent growth over the $30.68 average purchase price of the 700 shares.

However, the 1,372.97262 shares in the holding now have a substantially higher value than the original acquisition cost:

$49,742.80 market value of 1,372.97262 shares on 03/31/2021

-$21,477.00 original acquisition cost excluding transaction fees

=========

$28,265.80 total gain

Much of the gain is due to the 672.97262 additional shares acquired by DRIP. Compare that market value with the market value of the original 700 shares on 3/31/2021:

700 original shares

x36.23 03/31/2021 share price

=========

$25,361.00 value of original shares on 03/31/2021

The following chart reveals how the market value of the Pfizer holding continued to rise over time, despite the poor share price performance and dividend rate cut during the Financial Crisis and Great Recession of the 2008-2011 period. Market value substantially dipped in 2009-10 below the total cost basis of $21,477.00. However, rising PFE share price and the additional shares bought with DRIP mitigated and boosted this result significantly. The 03/31/2021 value of $49,742.80 is 131.6 percent higher than the original 700 share acquisition cost of $21,477.00.

Quarterly Dividend Payout

As you might suspect, I focus more on income growth than capital gain. For some dividend growth investors, capital gain borders on undesirable or at least a non-subject. In fact, a capital loss (on paper) means DRIP acquires more shares as opposed to a capital gain. Today, the dividends on 1,372.97262 shares are paying me $2,117.72 per year (growing every quarter), which I reinvest with DRIP. Current PFE yield is 4.31 percent, but the payout has a yield on original cost (YOC) of 9.86 percent. At any time, I could deactivate DRIP and use the dividends for spending income, cash build-up or other stock purchases versus buying more PFE shares.

The PFE quarterly dividend payouts are growing impressively with DRIP. Those payouts are my ultimate goal. The payout history is graphically shown in this chart, another thing of beauty:

The compounding action of dividend rate increases and dividend reinvestment ultimately provided a respectable growing income. Also, PFE's depressed share price boosted share count growth, leading to higher dividend payouts.

Since the dividend rate cut in 2009, the dividend payout has grown at a solid 11.96 percent CAGR - very respectable. It definitely appeals to this dividend growth investor. Without DRIP, this number would be around 5.82 percent. The nice growth rate with DRIP encourages me that Pfizer's management is committed to shareholders. I have a growing PFE income snowball.

Total Cumulative Dividends

Total cumulative dividends provide insight into the importance of what appears to be relatively small quarterly payments. But patience is the key. It rewards those that accumulate growing dividends every quarter, just like clockwork.

The following chart documents the total dividends paid to me over the life of the Pfizer investment. The nice thing about this chart is that total dividends are now climbing at an increasing rate (steeper slope). Pfizer's dividends mitigated (and took advantage of) the depressed PFE stock price and built income and wealth in a moderately impressive manner. This chart graphically reveals the compounding and dollar cost averaging power of a dividend stock "buy and hold" approach coupled with dividend reinvestment.

The PFE stock price jumps around by the minute, just like all stocks. However, this chart shows a steadily improving and smoothly growing benefit. What's not to like about this?

Pfizer has paid me a total of $19,237.50 in dividends in almost two decades of the investment. Those payments represent an 89.57 percent return of my original total cost of $21,477.00. In roughly another year, the cumulative dividends will exceed the original cost.

Considering my PFE holding suffered through the Financial Crisis and the big dividend cut, I think it has turned out reasonably well. The experience has reinforced my commitment to dividend growth investing and compounding with dividend reinvestment.

With dividend payouts reliably growing every quarter, life could be worse. I intend to keep PFE.

Here are the key lessons from my PFE dividend growth investment:

• Dividend growth investing (DGI) reliably grows income without selling shares.
• DGI requires time and patience - the earlier an investor starts, the better.
• High-quality companies with long track records of dividend growth provide best results.
• With patent expirations, pharmaceutical company risks resemble high-tech companies.
• Don't be afraid to "average-down" if the market knocks down a stock you just bought.
• Dividends can grow market value (or reduce losses) despite depressed prices.
• Dividends of high-quality companies are more reliable and predictable than stock prices.
• Reinvest by activating DRIP and watch every dividend exceed the previous one.
• DRIP makes share count grow regardless of dividend rates or prices.
• DRIP share purchases are an effective form of dollar cost averaging.
• DRIP works automatically every quarter, requiring no effort and no transaction costs.
• Depressed prices directly benefit DRIP by boosting share count and dividends.
• Measure performance based on income and asset value growth, not just price.

My PFE share price, dividend rate, total shares owned, market value and dividend payout are all positive. And the cumulative dividends paid are approaching original total cost. My primary objective of dividend payout growth is occurring impressively.

Analyst’s Disclosure: I am/we are long PFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The article primarily describes a dividend growth investing experience with PFE over two decades.