Pfizer Cuts The Dividend… Now What?

| January 26, 2009 | 0 Comments

The alarm went off early this morning.  It always does on Mondays.  Five more minutes I told myself… five more minutes.  The next thing I know I’m running late.  Damn snooze button.  I quickly jumped into the shower.
Then, like always, I turn on CNBC.  I do it every morning when I’m getting ready.

With the TV on in the background, I can quickly catch up on what’s moving the markets.  This morning was no different.  News from the White House, oil, the auto industry.  It was news on Pfizer (PFE) that made me stop dead in my tracks.

That’s when my morning went from bad to worse.

As many of you know, I’m a big fan of Pfizer.  But what happened this morning made me mad as…

I like Pfizer.  They’re a huge drug company, one of the oldest in the industry.  They have a long and profitable history.  The business has had its struggles recently, but management was making all the right moves. Cutting costs, consolidating production, trying to develop new products.

I liked the story so much I bought the stock for my own account.  My plan was to buy and hold this stock for decades… and soak up that rich 7% dividend it was paying out.  Maybe you remember my article “Profit From The $2.2 Trillion Healthcare Market.”

So much for those plans.

I was punched square in the stomach this morning by Pfizer management.  Today they announced three big things.  First was their year-end numbers.  Second was the intended acquisition of Wyeth (WYE).  And third was their planned reduction of the dividend.

Needles to say, watching the dividend get slashed didn’t make me a happy shareholder.  But more on that in a moment.

This tie-up with Wyeth is a great thing for the company.

It solidifies Pfizer’s position as a leading drug company.  Wyeth products can now be sold through the giant Pfizer sales machine.  And the merger gives the companies the opportunity to dramatically cut costs.

The deal is valued at $68 billion.  It’s going to ramp Pfizer’s revenue by almost 50%.  After the merger management expects to cut the workforce by 15%.

All of this is great news for Pfizer.

That’s why the news of the dividend cut hit me so hard.  Remember this dividend has been paid consecutively for 70 years.  Every year for the last 41 years the company increased their payout.  In the last ten years alone the dividend was up 18% per year.

So much for the juicy dividend.

When I was buying it had a 7% yield.  Aggressive, yes, but not so dramatic I’d expect a cut.  Management clearly didn’t agree with me.  I was counting on the dividend for my retirement planning.  I was looking to hold this stock for decades…

Maybe you’re in the same situation.

So what do we do now?

First, we need to realize this is why we diversify our investments.  Pfizer may have cut their dividend, but a number of other companies are still going strong.  Some are even increasing dividend payouts.  Holding a basket of stocks lessens our chances of losing big chunks of money when something unexpected happens… and this was unexpected!

Second, we have a decision to make.  We have three options with Pfizer. We buy, we hold, or we sell.

So what’s the call?

Despite the management’s poor handling of the dividend, they seem to be moving in the right direction.  They’re cutting costs aggressively, and looking to improve their product portfolio.  Buying Wyeth goes a long way towards those goals.  I believe the combined business will be bigger and better than before.

So, no, now’s not the time to sell.

If we’re not going to sell, then we should hold any position we currently have.  If you’re like me, the damage is already done.  But there’s a bigger question…

Should we buy Pfizer?  Is now the time to add to the position?

I say flat out, NO.  And here’s why.  This acquisition will hang like a lead weight on the stock.  I wouldn’t be surprised to see the stock trade lower in the next few weeks and months (maybe another 10% or 20%).

This merger needs to be approved by a bunch of different people.  Both company shareholders, and not one but two government agencies (the FTC and the Justice Department).  That creates uncertainty.  And uncertainty is a big reason to stay away from some stocks.

The business is set to improve, but the stock probably won’t go far in the short term.  If you’re looking to buy, hold off until more details about the merger become known.  Once that uncertainty is lifted, the stock has a good chance to rally.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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