Merck Dividend Hike Likely to Pressure Pfizer

While some companies are accelerating the payments, that does not appear to be the case here ahead of the tax change date when the Fiscal Cliff kicks in. Payment will be made on January 8, 2013 to holders of record at the close of business on Dec. 17, 2012.

Merck’s prior dividend hike was announced in November 2011 when the Board raised the dividend from $0.38 to $0.42 per common share. With so many drugs coming off patent we did not have a firm assurance that Merck would be able to boost its payout this time around because Thomson Reuters has estimates of $3.69 EPS for 2013 versus $3.80 EPS for 2012. Even revenues are expected to decline to $45.77 billion in 2013 versus expectations of $47.04 billion in 2012.

With shares at $44.05, this annualized payout of $1.72 per common share will generate a yield of 3.9% as of now. This translates to a dividend payout ratio of about 47% of next year’s adjusted income.

This probably just tipped Pfizer Inc. (NYSE: PFE) into hiking its dividend soon as well. This rival’s dividend has been $0.22 for four straight quarters now and that $0.88 annualized payout based on a $24.32 share price comes to about 3.6%.

Merck raised its dividend by only about 2.4% but it now yields closer to 4%. This latest hike puts Pfizer in a position where it would have to raise its dividend by another 10% if it wants the same yield as Merck. Based on the Thomson Reuters consensus estimate of $2.30 EPS for 2013 on Pfizer, its current dividend payout ratio is about 38% of its adjusted income.

Merck just put the heat on Pfizer to pay out more of its adjusted income ahead.

JON C. OGG