Pfizer Cuts The Dividend... Now What?
The Dynamic Wealth Report
January 26, 2009
Pfizer Cuts The Dividend... Now What?
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.
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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.
• Gold Mining (Up 8%)
Year to date the best performing industry is Gold Mining. I know we’re
only 26 days into the New Year, but concerns over continued global
recession and fear of devalued money is pushing investors towards gold.
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