After 41 years of regularly increasing its dividend, the beleaguered drugmaker has kept the payout steady at 32 cents a share as it looks to preserve cash in the face of the looming Lipitor patent expiration in 2011. Pfizer ceo Jeff Kindler actually signaled recently that the dividend would, at the least, be maintained. Some may find the move disappointing, but of course, this is not the same thing as reducing the payout, which some Wall Streeters earlier this year thought would occur.
Why? The $8 billion in dividend payments Pfizer made to shareholders last year is widely considered to be the biggest reason many investors still hold the stock. Put another way - Pfizer shares aren't attractive for the pipeline. To maintain the payout, some analysts speculated Pfizer may have to repatriate off-shore cash, driving up its tax rate. Remember that Lipitor contributed 65 percent of Pfizer’s free cash flow last year. This is an issue, because the dividend can only be paid from US funds.
For those who complain there was no increase despite a $26 billion cash hoard, remember that the Pfizer board has been divided about whether to pursue a big acquisition (back story here). Preserving cash can also mean preserving options.
3 Comments
That's $8 BILLION a year they could hold on to by killing the dividend. Yes, that would send the stock price reeling. But...so...? They've got a huge warchest. Are they really expecting to tap the equities markets any time soon? If the stock drops by half, but they are $8 BILLION richer per year, I'd have to say that for a company like Pfizer that's a net win.
Everyone is still awaiting word on what they are going to DO with all that money... They already have (by far) the most cash of any of the big pharma. In the short term, this move is going to further increase thier cash. Is this a prelude to a major aquisition?
A good stock price probably isn't a bad thing for a big pharma company to have these days. The general speculation is that there will be a round of mergers to reduce overcapacity (fewer companies means less competition on future drugs, which means better negotiating postures with governments that are looking to negotiate more).
If a big pharma's stock were to tank they would become a takeover target. Conversely, a big pharma with a strong stock price could leverage that price in a stock trade.
Ultimately, the reason to have or not have a dividend ought to be what the company can do with money. If a company has something useful to do with a few billion in cash, it ought to do it (reducing dividends as needed). If a company has no immediate use for cash, it should be returned to shareholders except for a moderate amount for operational needs.