Get Ready for a Pfizer Dividend Hike... A Holiday Gift From Big Pharma (PFE, MRK, WPI, TEVA)

We recently gave a full review of the DJIA components we expect to raise their dividend payouts in the weeks and months ahead.  Among those we expect to raise the dividend is Pfizer Inc. (NYSE: PFE).  If last year is any trend-setting indicator, then Pfizer should be raising its dividend payout in the next week or so.  Consider its a Christmas present from Big Pharma.

While we are expecting a dividend hike again, it seems unlikely that the boost will end up being a large dividend boost.  Pfizer’s current $0.80 per year annualized payout compares to earnings estimates of $2.28 EPS for 2011 and $2.31 EPS for 2012.  In short, Pfizer is not quite paying out 40% of its normalized income.

Drug rival Merck & Co. Inc. (NYSE: MRK) recently announced its first dividend hike in years.  It was actually the first hike since the Vioxx scandal.  That should only keep pressure on Pfizer to go ahead and raise its dividend.

There is a history of its dividend hike coming this time of year, but the payout hike won’t be realized as cash in the bank for investors for another 60 days or so.  The dividend being raised was last announced on December 13, 2010 and previously on December 14 of 2009.

Pfizer noted last year that the move to $0.20 from $0.18 per quarter was roughly an 11% hike.  Pfizer also has a game of catch-up to play as its dividend used to be much higher at $0.32 per quarter before the recession caused many companies to lower their very high yields and before its most recent large M&A deals.

Merck’s dividend hike was 11%.  We will make a prediction for the coming hike: ).22 or $0.23 per quarter.  That will translate to a 10% hike or a 15% hike to the dividend payouts.  The current yield of Pfizer is 3.91% based on a share price of $20.45.  Merck’s dividend was raised to $0.42 from $0.38 per quarter, and that translates to a dividend yield today of 4.72% based upon a current price of $35.55.  The old yield at Merck based upon today’s price would still be 4.27%.

The Merck hike alone will have put pressure on Pfizer to hike its dividend.  A 10% hike to $0.22 would generate a dividend yield of 4.30%.  That would have caught it up to the old Merck payout.  A hike to $0.23 per quarter would generate a current dividend yield of 4.5%. If you follow cause and effect theory, or action and reaction theory, Pfizer’s hike is a must.  The boost would still be under or close to 40% of expected income from operations per share to be paid out.

Are there some risks that Pfizer might not raise its dividend?  Yes, but they are just unlikely to matter.  After Merck made the first jump in its dividend in years, Pfizer almost has to follow suit.  Watson Pharmaceuticals, Inc. (NYSE: WPI) is the local outfit which wins from the recent patent expiration of its blockbuster statin Lipitor, and Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) is set have a generic version of Lipitor after this coming May.  While Pfizer’s market share on the entire Lipitor market may only be 40% of the past, this patent expiration date had been known for years.

Perhaps the biggest risk to ongoing dividend hikes is not just the endless restructurings of Pfizer, but its major acquisition trail.  That effort has been almost endless.  Its acquisition efforts have also given the company a very wide moat of a drug pipeline ahead and it has insulated its share price from the patent cliff.

At $20.45, Pfizer’s market capitalization rate is $157 billion and its 52-week trading range is $16.59 to $21.45. Merck’s $35.55 price generates a market cap of $108.2 billion and the share price compares to a 52-week range of $29.47 to $37.65.

JON C. OGG