High-Yielding Dividend Stocks: Separating Fact from Fiction
When searching for high-yielding dividend stocks, it’s essential to separate the wheat from the chaff. Oftentimes, dividend stocks with yields above 6% can be yield traps, offering unsustainable dividend income to shareholders. However, occasionally, you may stumble upon a high-yielding dividend stock that’s not a yield trap. One such example is Pfizer (PFE), a well-known healthcare stock with a 5.9% dividend yield, more than quadruple the 1.3% yield of the S&P 500 index.
Strong Third-Quarter Earnings Results
On October 29th, Pfizer released its third-quarter financial results, which showcased a 31.2% increase in total revenue to $17.7 billion, surpassing analyst consensus by $2.8 billion. The company’s Primary Care segment revenue jumped 43.6% year-over-year to nearly $9.1 billion, driven by rising COVID-19 infections and increased demand for antiviral COVID-19 treatment, Paxlovid. Additionally, Pfizer’s Oncology segment posted $4 billion in revenue, up 29.8% over the year-ago period, thanks to ongoing momentum from advanced prostate cancer treatment Xtandi and recent launches of advanced bladder cancer therapy Padcev and lymphoma therapy Adcetris.
Cost Reductions and Improved Profitability
Pfizer’s cost realignment program, launched last October, aims to achieve $5.5 billion-plus in annual targeted savings. The company expects to realize $4 billion of these savings in 2024, with the remaining $1.5 billion-plus anticipated by the end of 2027. These cost reductions have improved the company’s profitability, with adjusted diluted EPS growth significantly outpacing revenue growth in the quarter.
Robust Product Pipeline and Regulatory Approvals
Pfizer’s product pipeline is thriving, with over 100 drug candidates as of October 29th. The company has received several regulatory approvals in recent months, including an expanded indication for its respiratory syncytial virus vaccine and approval for the monoclonal antibody therapy Hympavzi. As benefits from the cost savings programs are achieved and new drugs are launched, this is expected to reflect positively in the company’s earnings.
A Secure Dividend and Financial Health
Pfizer’s above-average dividend looks to be backed up by its profits, with an adjusted diluted EPS payout ratio on track to be in the low 60% range in 2024. The company remains financially healthy, having repaid $4.4 billion of debt in the first nine months of 2024. Its interest coverage ratio through the first nine months of 2024 was 5.1x, earning an A credit rating from S&P Global.
Compelling Valuation and Analyst Consensus
Pfizer’s current share price of $28 implies a current-year P/E ratio of just 10.6, materially less than the 10-year average P/E ratio of 13.5. Analysts have a Moderate Buy consensus on Pfizer, with an average 12-month price target of $32.47 per share, suggesting 14.65% upside ahead.
A Buy Rating for Pfizer
Considering Pfizer’s existing product portfolio momentum, new drug launches, cost savings, secure dividend, financial health, and compelling valuation, I’m initiating coverage with a buy rating. This healthcare stock is poised to fundamentally bounce back, making it an attractive option for income investors seeking a mix of starting income and dividend growth.
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