Why Pfizer's 7%-Yielding Dividend Just Became Safer -- and More Tempting

Income investors usually don't mind too much if a stock doesn't deliver tremendous gains, as long as it keeps the dividends flowing. They typically don't like it when a stock tumbles, though, as Pfizer (NYSE: PFE) has done this year.

But Pfizer's juicy forward dividend yield of 7% offsets most of the year-to-date decline. The company also reported good news in its third-quarter update earlier this week. Here are four reasons why Pfizer's dividend just became safer -- and more tempting.

Image source: Getty Images.

1. A stronger earnings outlook

The greater a company's earnings, the better its position will be to pay dividends. However, Pfizer's adjusted earnings per share (EPS) declined 18% year over year in Q3. That might seem to indicate that the company's dividend is on shakier ground. But there's more to the story.

This earnings decrease was mainly driven by a one-time acquired in-process research and development charge related to Pfizer's licensing deal with 3SBio (OTC: TRSBF). Without the impact of this charge, the company's adjusted EPS would have increased slightly year over year.

Pfizer also raised and narrowed its full-year adjusted diluted EPS guidance to a range of $3.00 to $3.15 from its previous outlook of $2.90 to $3.10. This reflects management's confidence in the financial performance the company will deliver in the fourth quarter.

2. Major cost reductions are on track

There's a good reason to expect further bottom-line improvement in the future, which would bolster the dividend. Pfizer's cost-reduction initiatives remain on track.

In the Q3 earnings call, CFO David Denton said that the company expects to deliver at least $4.5 billion in cumulative net cost savings by the end of 2025. He added that the efforts should produce around $7.7 billion in savings by the end of 2027.

Sure, Pfizer will reinvest roughly $500 million of the cost savings identified in R&D to advance pipeline programs. However, most of the $7.7 billion will be available for other capital allocation priorities, including funding the dividend.

3. The patent cliff strategy seems to be working

What's the single biggest threat to Pfizer's dividend? Probably the huge patent cliff the company faces. Over the next few years, several of Pfizer's top-selling products will lose patent exclusivity. The good news for Pfizer (and its dividend), though, is that the drugmaker's strategy to mitigate the looming patent cliff seems to be working.

Several products picked up through acquisitions in recent years continue to enjoy strong momentum, especially migraine therapy Nurtec ODT. Pfizer's internal R&D is also paying off, with 28% year-over-year sales growth for lung cancer drug Lorbrena a great example.

Overall, revenue from recent launches and acquired products jumped 9% year over year in Q3. Pfizer expects that the growth from these products will largely offset the negative impact of its upcoming losses of exclusivity.

4. Continued management support for the dividend

Every time Pfizer's management publicly expresses support for the dividend, income investors should be able to breathe a little easier. And management again did so in the Q3 update.

CEO Albert Bourla mentioned "remaining committed to our dividend" in his opening remarks in the Q3 earnings call. CFO David Denton noted, as he has done in the past, that Pfizer's capital allocation strategy includes "maintaining and growing our dividend over time," as well as reinvesting in the business and making stock buybacks that enhance shareholder value.

Denton was even asked point-blank by an analyst on the Q3 call what Pfizer needed to do in the near term to grow its dividend while deleveraging. He replied that the company's increased productivity across its platform has enabled it to reduce leverage from around 4 times to 2.7 times. Denton said this deleverage has "given us increased flexibility to do both business development as well as maintain and grow our dividend over time."

Keith Speights has positions in Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.