Pfizer (NYSE: PFE) has a huge 5.9% dividend yield, which is a clear sign that investors are worried about the dividend’s sustainability. That’s just one of a handful of companies where the same statement can be made across multiple industries. Here’s why the risk may not be as big as it seems with high-yielders Pfizer, Bristol Myers Squibb (NYSE: BMY), Realty Income (NYSE: O), W.P. Carey (NYSE: WPC), and Hormel Foods (NYSE: HRL).
Pfizer and Bristol Myers Squibb are dealing with issues
There’s no question that Pfizer and Bristol Myers Squibb are under pressure today. And there’s a good reason, as both of these pharmaceutical companies have patent expirations coming up. They are working on new drugs to offset the expected revenue decline, but sometimes innovation and patent expirations don’t align perfectly. This is why Pfizer’s yield is 5.9%, and Bristol Myers Squibb’s is 4%. The average drug stock yield is 1.3%.
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In Pfizer’s case, dividend concerns are material because its payout ratio is well above 100%. However, dividends come from cash flow, not earnings. Comparing the drug giant’s dividend to cash, using the cash dividend payout ratio, offers some solace. That ratio is around 85%, which is high, but suggests the dividend remains supportable. Meanwhile, the company continues to state that the goal is to maintain and grow the dividend over the long term.
Bristol Myers Squibb’s payout ratio is a far more reasonable 55%, matching its cash dividend payout ratio. And for those worried about patent expirations, its “growth portfolio” already generates more revenue than its “legacy portfolio.” Patent expirations will be a headwind, but the drug maker is making clear progress toward offsetting the hit. And the truth is, patent expirations are a normal part of the business for drug makers, so neither of these high-yielders is facing an unusual problem.
Realty Income and W.P. Carey: Higher rates will bite, but markets will adjust
Realty Income and W.P. Carey are both high-yield net lease real estate investment trusts (REITs). Realty Income’s yield is 5.5%, while W.P. Carey’s is 5.8%. There are a couple of issues to consider here. First, REITs tend to have high yields, though the industry average is 3.6%, so these two REITs are still on the high side. Second, net leases are usually a financing transaction for the seller, who often becomes the lessee in sale/leasback deals.
