When it comes to dividend stocks, mega-sized pharmaceutical firm and Dow Jones component Pfizer Inc. (NYSE:PFE) has been one of the poster children. With a market-beating 3.5% yield, great range of new drugs and decent dividend growth since the recession, PFE stock has found its way into plenty of income-seekers portfolios.
But the best is yet to come.
Thanks to the new GOP tax plan, PFE stock could be sending more dividends and buybacks investors’ way. For investors in Pfizer, it’s exactly the kind of news that help breaks the stock out of its doldrums and push it ahead.
For the mega-pharmas like Pfizer, the story has long been about generating cash flows. Big hit therapies and blockbuster drugs- like PFE’s Viagra- have been huge at generating some copious amounts of cash flows for their producers. It’s what really drives the biggest pharma firms.
It’s also why the so-called patent cliff has been a major headache for PFE and its rivals. Without the cash generated by these blockbusters, many investors fear that the major pharmaceutical firms won’t be able to pay all those handsome dividends they’ve become accustomed to. And for the most part, they are right.
As some of PFE’s major blockbusters have fallen off patent protection, cash flows at Pfizer have started to drop hard. Since about 2012, PFE quarterly cash flows have drifted lower by about $3 billion.
Even worse is that this year, the first and second quarters of this year saw some major negative working capital adjustments that actually caused a major hit to the firm’s free cash flows. Those quarters took about $4 billion off PFE’s cash flow potential for the year.
That’s pretty junky news as far as the dividend is concerned. PFE isn’t close to cutting it anytime soon, but we are getting closer to the point where the dividend payout matches FCF.
But there is some light on the horizon in terms of the dividend and its coverage; and we are talking about taxes.
Pfizer’s tax rate is pretty darn high and the firm has struggled with that load in recent years. In fact, that high tax rate was the reason behind the pharma’s attempts to buy AstraZeneca plc (ADR) (NYSE:AZN), and then Allergan plc (NYSE:AGN). The idea was to “move” to Europe via a corporate tax inversion and save.
Well, with the latest tax plan quickly becoming law, PFE doesn’t have to do that.
As of the end of 2016, Pfizer has one of the largest U.S. corporate cash piles parked offshore, roughly $160 billion. That money has basically been sitting there thanks to the threat of high taxes. With the new tax plan in place, PFE will still owe a chunk of taxes on that money, but the rate will be crazy low.
So, it makes sense for the firm to pull that money over. And that’s just what’s it doing.
PFE recently announced that it is boosting its dividend by 6% to 34 cents per share. In addition to that, Pfizer has also announced an additional $10 billion in buybacks on top of its current $6.4 billion buyback program currently underway.
The higher dividend and boosted buyback is huge news for owners of PFE stock and shows what the tax plan will really be good for. But for Pfizer, it does something else besides paid shareholders bottom lines. And that provides a cushion.
With that cash hitting its U.S. accounts, PFE stock now has plenty of wiggle room to smooth over its cash flow issues. There should be no problems sending more dividend growth investor’s way over the next few years.
But even better, it allows it focus on its promising pipeline of drugs. Pfizer has 96 different drugs in various stages of clinical trials. Moreover, the firm believes it should have as many as 30 product approvals over the next five years.
Of those, 15 have the potential to be blockbusters. And while R&D have run the show, the huge cash pile will allow it buy some hefty biotech M&A AND still provide a dividend cushion for investors while these drugs to market.
In the end, the Republican tax plan is exactly the right medicine for PFE shareholders. By being able to shift much of that $160 billion in cash back to its U.S. accounts, Pfizer will be able to pad its current payout, ignore any cash flow issues from current off-patent blockbusters and essentially kick the can until its pipeline starts paying benefits.
For investors, you really couldn’t ask for more. It’s everything you could hope for.
The Bottom Line: The tax plan and its ability to strengthen Pfizer’s dividend and future, makes PFE stock a big time buy.