Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Pfizer's Dividend Became a Trap in June 2026
Transcript
- Lucas: Pfizer is down over seven percent this week. That brings its year-to-date decline to something like forty percent. And the interesting thing is, the dividend yield is now north of ten percent. Luna: Ten percent yield sounds like a dream for income investors, but it's usually a red flag. Lucas: It's almost always a red flag. A yield that high typically means the market is pricing in a dividend cut. And with Pfizer, the concerns are pretty clear: their Covid revenue has collapsed, they have a massive patent cliff coming, and the pipeline hasn't delivered blockbusters fast enough. Luna: Let's put some numbers on that. What's the payout ratio looking like? Lucas: Based on this year's expected earnings, the payout ratio is well over one hundred percent. They're paying out more in dividends than they earn. That's not sustainable. Compare that to, say, JPMorgan, which just announced a fifty billion dollar buyback after the Fed stress test. Their payout ratio is conservative, and they're returning capital because they have excess capital, not because they're trying to paper over a collapsing stock. Luna: So JPMorgan's buyback signals confidence. Pfizer's high yield signals distress. Lucas: Exactly. And the market is telling you that. Pfizer's stock has gone from forty dollars to twenty-four dollars over the past couple of years. The dividend has stayed the same, so the yield has gone from around four percent to over ten. But the board can only keep that up for so long before they have to make a choice. Luna: What are their options? Cut the dividend, or borrow to pay it? Lucas: Borrowing to pay dividends is a terrible look. It signals that the business isn't generating enough cash. Pfizer does have a strong balance sheet, but they're also facing a wave of patent expirations on drugs like Eliquis and Ibrance, which represent billions in revenue. The pipeline has some hopeful assets, but nothing that's going to replace that revenue overnight. Luna: So the classic value trap: a high yield that looks tempting, but the underlying business is deteriorating. Lucas: Right. The thing is, a lot of retail investors see that ten percent yield and think 'I'm getting paid to wait.' But what they're really doing is catching a falling knife. If Pfizer cuts the dividend by half, the yield at the current price is still five percent, but the stock could drop further on the news. Luna: And this is where active stock picking matters. An index fund would just hold Pfizer at its market weight, but a good active manager would be asking whether the dividend is safe. Lucas: That's the whole point of this show. You can't just screen for high yield and buy. You have to understand the business. Pfizer's post-Covid revenue decline was predictable. The question was whether management could cut costs fast enough and refill the pipeline. So far, the answer is no. Luna: It reminds me of what happened with IBM years ago. High yield, declining business, eventually had to cut. Lucas: Great comparison. IBM's yield got up to around five percent before they finally cut. Pfizer is already at double that. The market is basically screaming that a cut is coming. Luna: Let's step back. If you're an income investor, what should you look for instead? Lucas: Look at the payout ratio first. Under sixty percent is generally safe. Look at free cash flow coverage. Look at the business's competitive position and whether revenue is growing or at least stable. Pfizer fails on most of those. Compare it to a company like Microsoft, which has a low payout ratio, massive cash flow, and a growing business. Their yield is under one percent, but it's far more reliable. Luna: Yeah, chasing yield without doing the homework is how people get burned. Lucas: And that's exactly why we do this show. If these conversations have helped you think about a decision differently, or avoid a mistake like buying Pfizer for the dividend, that's the whole point. Luna: It really is. And a couple of dollars a month from listeners is genuinely what keeps these episodes coming — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: It makes a real difference. No ads, no sponsors, just listener support. So thank you to anyone who does that. Luna: Alright, back to Pfizer. So what would you do if you owned it right now? Lucas: That's the tough question. If you bought it for the dividend, you might already be down a lot on the stock. The dividend might be the only thing keeping you in. But if a cut comes, you'll lose both income and principal. I'd rather take the loss and redeploy into something with better fundamentals. But I'm not a financial advisor — everyone has to make their own call. Luna: What about the broader pharma sector? Are there any that look better? Lucas: Some of the larger pharma companies like Lilly have strong pipelines and are growing. But they trade at much higher multiples. You're not getting a high yield there. The trade-off is safety vs. income. For income, I'd look at utilities or consumer staples before I touched a pharma stock with a ten percent yield. Luna: So the lesson here is: yield alone is not a signal. It's a symptom. Lucas: Exactly. You have to understand why the yield is high. If it's because the stock has fallen for good reasons, that's a trap. If it's because the company is growing earnings and the stock is flat, that's a different story. Pfizer is the former. Luna: And the market is telling you that every day with that declining price. Lucas: Right. So if you're an active stock picker, Pfizer is a great case study in why you need to look past the dividend yield and ask the hard questions about sustainability. That's what separates successful active investors from the rest.