Pfizer Just Declared Its 352nd Straight Quarterly Dividend. Is the 6% Yield Safe?

Last week, drugmaker Pfizer (NYSE: PFE) declared a $0.43 fourth-quarter dividend, its 352nd consecutive quarterly dividend. The forward annual dividend, therefore, is $1.72 per share, which represents a handsome 5.9% yield. Consider that the current average S&P 500 dividend yield is around 1%, and you'll see how attractive Pfizer's yield is.

But is Pfizer's dividend safe? It's something every income investor absolutely needs to know, because a company's share price typically declines after a dividend cut, for two primary reasons. One, income investors often sell the stock to seek income elsewhere. And two, investors more broadly view a dividend cut as a flashing red warning signal that a company is facing financial stress and weak cash flow.

And Pfizer did cut its dividend in half back in 2009 during the great financial crisis, when many companies were forced to slash their payouts. But since 2010, the company has raised its dividend every year. That's impressive. But is it sustainable?

Patent cliffs loom for Pfizer

Like many other drugmakers, Pfizer is facing some significant patent cliffs. Its blood-thinner drug, Eliquis, and its autoimmune disease drug, Xeljanz, lose U.S. patent exclusivity this year. Ibrance, a breast cancer drug, and Xtandi, a prostate cancer drug, will lose their exclusivity next year.

So, Pfizer has to continue to fill its pipeline with potential new drugs. That pipeline leans heavily on new cancer drugs, and it has been expanding that with development programs to treat breast, prostate, bladder, and lung cancers.

Fortunately, the company has a robust product portfolio that should keep revenue and cash flow healthy until new drugs are approved and launched. That includes migraine drug Nurtec, which saw 18% growth in the second quarter, and oncology drugs Lorbrena (37% growth) and Padcev (23% growth). Plus, free cash flow, which is needed to pay dividends, has totaled some $11 billion over the past four quarters, more than $1 billion above its dividend payments.

Management has reiterated that, as part of its capital allocation strategy, it is committed to maintaining, and over the longer term, growing the dividend.

Investors are cautiously optimistic: They've bid the stock up more than 17% year this year, which means it has outperformed the S&P 500 index by more than four percentage points. The stock has climbed about 19% over the past 52 weeks.

So, if you want a high-yielding drug stock, Pfizer could be a good choice. But you have to have confidence that it can replace patent-cliff drugs with new pipeline drugs to keep cash flow healthy enough to pay its juicy dividend.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.