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Pfizer Shifts Dividend Adjustment to Second Quarter of 2021; Income Investors Still to Remain Whole

Pfizer on Friday announced a 2.6% dividend increase for the first quarter of 2021, raising its quarterly payout from 38 cents per share to 39 cents. 

However, the company still plans to lower its dividend to reflect the spin-off of its off-patent drug business (about 20% of profits), which closed in November after combining with generic drug maker Mylan to form a new publicly traded company called Viatirs.

We thought Pfizer's dividend reduction might come in the first quarter since the spin-off transaction closed last month, but the adjustment will now take place in the second quarter since that is when Viatris will begin paying dividends. 

In its press release on Friday, Pfizer confirmed that new dividends paid by Viatris will fully offset Pfizer's dividend reduction to keep income investors whole (assuming you owned shares prior to the spin-off):

"The transaction to combine Upjohn with Mylan to form Viatris Inc. closed on November 16, 2020. It is expected that Viatris will begin paying a quarterly dividend in the second quarter of 2021, at which time Pfizer’s quarterly dividend will be reduced such that the combined dividend dollar amount received by Pfizer shareholders, based upon the combination of continued Pfizer ownership and approximately 0.124079 shares of Viatris which were granted for each Pfizer share in the spin-off, will equate to Pfizer’s dividend amount in effect immediately prior to the initiation of the Viatris dividend."

– Pfizer Press Release, 12/11/20

After factoring in Pfizer's dividend increase and the latest pro forma financial statements available, we estimate that Pfizer will lower its second-quarter dividend from 39 cents per share to around 35 cents.

The actual amount could come in a little lower if Viatris decides to pay out a larger dividend than expected; Viatris targets a free cash flow payout ratio of at least 25%.

But the bottom line is that Pfizer's dividend is unlikely to be reduced by much more than 10% (representing a yield of at least 3.5% at today's price), and new dividends paid by Viatris will offset the income loss for investors who decide to continue holding their shares.

Based on our dividend estimate and "new" Pfizer's 2020 adjusted EPS guidance, which excludes the spin-off's results, Pfizer's payout ratio would have been around 60% this year.

Pfizer's pharma peers generally maintain payout ratios between 40% and 50%. While Pfizer targets 10% annual earnings growth, the firm may grow its dividend at a low single-digit pace to bring its payout ratio down over the next few years.

We expect Pfizer to retain its Safe Dividend Safety Score once its lower dividend is put in place for the second quarter.

As we discussed in November, the firm does not have any major patent expirations through 2025, and its portfolio remains reasonably diversified with no drug exceeding 15% of revenue last quarter.

Pfizer also retains a strong balance sheet, with Upjohn paying Pfizer $12 billion at the time of separation. Management will use these proceeds to pay down debt, improving flexibility for future acquisitions.

Viatris's dividend will likely receive a Borderline Safe rating once it announces its first payout.

While the company's scale and diversified portfolio should provide solid cash flow, Viatris will have elevated leverage after paying Pfizer a $12 billion distribution.

Ratings firm Standard & Poor's has given Viatris a preliminary BBB- rating, one notch above junk, and management plans to retain up to 75% of free cash flow for deleveraging purposes.

We expect Viatris shares to yield around 4.5% to 5% based on the stock's price as of December 14 and management's payout ratio guidance. 

Overall, Pfizer's dividend increase signals that the company remains optimistic about its long-term outlook. 

Investors just need to remain aware that Pfizer's dividend reduction related to its spin-off is still coming and will impact the second-quarter payout. 

This dividend adjustment does not represent a fundamental change in Pfizer's value and is not a reason to sell unless you believe Pfizer will be worse off without its off-patent drug business. 

We remain optimistic about the company's long-term future and plan to continue holding our shares of Pfizer in our Conservative Retirees portfolio.

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