Wondering if Pfizer's 7.6% Dividend Yield Is Sustainable? Here's What You Need to Know.

Income investors have liked Pfizer (PFE -1.13%) for years. However, the big drugmaker’s exceptionally juicy dividend these days has made its stock even more attractive.

But when a dividend yield reaches ultrahigh levels, investors can feel a heightened level of uncertainty. Wondering if Pfizer’s 7.6% dividend yield is sustainable? Here’s what you need to know.

Looking at the numbers

Pfizer’s management remains confident about the company’s ability to fund the dividend. CFO David Denton emphasized on the first-quarter earnings call that “our commitment to [the] dividend is steadfast.” As he has in the past, Denton said that Pfizer intends to maintain and grow the dividend over time.

However, I don’t think income investors should hang their hats on executives’ comments. After all, they aren’t definitively promising that the company will continue to pay dividends at current levels. Instead, the more pragmatic approach is to examine its financials to determine how sustainable the dividend is.

Pfizer’s dividend payout ratio of 122.5% looks concerning at first glance. A company can only pay out more in dividends than it generates in earnings for a limited time. Should income investors be worried? I don’t think so.

A much better financial metric to consider when evaluating the sustainability of the dividend is free cash flow. Pfizer generated free cash flow of around $9.8 billion in 2024. It paid roughly $9.5 billion in dividends last year. This doesn’t give the drugmaker a lot of cushion, but it is producing sufficient free cash flow to cover the dividend payments.

Importantly, Pfizer expects to achieve cost savings of $7.2 billion by 2027. This should help boost free cash flow and give more flexibility in funding dividends.

Wild cards

Does this mean Pfizer’s dividend is 100% safe? Unfortunately, no. The company faces several uncertainties that could make it difficult to maintain and grow the dividend.

The perennial challenge for drugmakers is the risk of pipeline setbacks. Pfizer recently experienced a highly visible example with safety concerns about danuglipron, which resulted in the company discontinuing development of the experimental weight management pill.

Pfizer’s financial performance hinges more on its pipeline than some of its peers’ do because of multiple patent expirations coming over the next few years. CEO Albert Bourla acknowledged on the Q1 earnings call that the company won’t be “a strong top-line growth story for the next three years” due to the loss of exclusivity for several key products. However, he believes Pfizer will be an “EPS [earnings per share] growth story” thanks to its cost reductions, business development, and new product launches. Again, though, Bourla’s optimism is warranted only if the pipeline delivers as hoped.

The steep tariffs threatened by the Trump administration on pharmaceutical imports could also hurt the company. Bourla said on the Q1 call that his discussions with government officials indicated that the main concern is with “critical medicines” made outside the U.S. Also, President Donald Trump recently told pharmaceutical industry leaders that they would have “a lot of time” to move drug manufacturing to the U.S. before being hit by tariffs. While signs point to Pfizer being able to navigate pharmaceutical tariffs relatively well, there’s still a financial risk.

A potentially greater worry, though, is the White House’s plan to implement international reference pricing for some prescription drugs covered by Medicare. This approach, often referred to as “most favored nation” or MFN pricing, pegs the price Medicare pays for drugs to the lowest price paid by other developed countries.

How problematic could MFN pricing be for Pfizer? It depends on the details of what the Trump administration does. The good news is that (based on the latest available data) only one of Pfizer’s products (pneumococcal vaccine Prevnar 20) ranks in the top 30 drugs for which Medicare Part B spent the most money.

The verdict on Pfizer’s dividend

Considering all these factors, I think Pfizer should be able to continue paying dividends at current levels despite the uncertainties it faces. But I wouldn’t bet on the drugmaker’s dividend yield remaining as high as it is now.

A lot of negativity is baked into Pfizer’s share price, with the stock trading at less than 8 times forward earnings. The average forward price-to-earnings ratio of around 16.5 for S&P 500 healthcare stocks is more than twice that.

Any pleasant surprises — perhaps pharmaceutical tariffs that don’t hurt Pfizer as much as feared — could boost the company’s share price. If the stock rises, its dividend yield will fall.

However, income investors shouldn’t focus as much on what the future yield might be as they do on what the dividend payments will be. I predict that over the next few years, Pfizer’s dividends will continue to be attractive.