Why High-Yield Pharma Dividends Are Overvalued and Risky

The pharmaceutical sector has long been a haven for income investors, lured by the sector’s reputation for stability and dividend growth. Yet beneath the surface of today’s high-yielding pharma stocks—AbbVie (ABBV), Medtronic (MDT), and Pfizer (PFE)—lies a precarious reality: unsustainable payout ratios, declining earnings, and rising debt. These metrics signal an impending reckoning for dividends, making these stocks far riskier than their attractive yields suggest.

The Math Doesn’t Add Up: Payout Ratios at Crisis Levels

Payout ratios—the percentage of earnings paid out as dividends—are the first red flag. AbbVie’s payout ratio of 266%, Medtronic’s 85%, and Pfizer’s 122% all exceed the 75% threshold often cited as a warning sign of dividend unsustainability. These figures reveal companies paying out more in dividends than they earn, relying on debt, asset sales, or stagnant earnings growth to fill the gap.

Declining Core Revenues Undermine Dividend Foundations

The decline of legacy drugs is the linchpin of this crisis:

1. AbbVie: Humira’s Collapse Leaves a Black Hole
2. Sales of its blockbuster drug Humira fell 51% year-over-year in Q1 2025 to $1.1 billion, gutting net income to $4.2 billion—a 31% drop from its peak.
3. New drugs like Skyrizi and Rinvoq (combined Q1 2025 sales: $5.1 billion) are growing fast (65% YoY), but they’re not yet large enough to offset Humira’s losses.

4. With net debt at $64.7 billion, AbbVie is borrowing aggressively to fund dividends, a strategy with a limited shelf life.

5. Medtronic: Stagnant Earnings Meet Rising Costs

6. Net income has been flat for over a decade, dropping 2% YoY in Q3 2024 to $1.29 billion.
7. Supply chain bottlenecks, legal battles over spinal cord stimulation devices, and slowing revenue growth have stalled earnings.

8. Despite reducing debt by 8% to $18.6 billion, Medtronic’s payout ratio nears 85%, leaving little room for error.

9. Pfizer: The Post-Pandemic Hangover

10. Paxlovid sales collapsed 76% in Q1 2025 to $491 million, dragging revenue down 8% to $13.7 billion.
11. The company’s payout ratio of 122% means dividends now exceed net income, funded by $44 billion in net debt and halted share buybacks.
12. R&D spending—over $10 billion annually—diverts cash from earnings, further squeezing margins.

Debt Burdens Expose Vulnerabilities

All three firms are leveraging debt to sustain dividends, a risky move in a rising-rate environment:
- AbbVie’s net debt has surged 24% in two years, now at $64.7 billion.
- Pfizer’s $44 billion debt load requires $757 million in annual interest payments, diverting cash from dividends.
- Medtronic’s $18.6 billion debt limits its flexibility to invest in growth or weather earnings shocks.

The Dividend Cut Domino Effect

History is a harsh judge: when payout ratios exceed earnings, cuts follow. Consider:
- In 2009, Pfizer slashed its dividend by 67% amid debt from its Wyeth acquisition.
- AbbVie’s dividend, now covering just 26% of earnings (per its payout ratio), is on a collision course with reality.

Analysts at Ned Davis Research warn that companies with payout ratios above 75% underperform peers by 3–5% annually due to eventual dividend cuts. For income investors, the risk is clear: a dividend pause or cut would trigger a sell-off, erasing gains from high yields.

The Bottom Line: Proceed with Extreme Caution

The allure of AbbVie’s 5.9% yield, Medtronic’s 2.8%, and Pfizer’s 7.6% is understandable—but fleeting. These stocks are ticking time bombs, with payout ratios, debt, and eroding revenue streams all pointing to one conclusion: the dividends are not sustainable.

Investors seeking income should look elsewhere—toward firms with payout ratios below 60%, strong R&D pipelines, or defensive cash flows. For now, the high yields of AbbVie, Medtronic, and Pfizer are a siren song best ignored.

In a sector where dividends have long been a safe harbor, these three stocks are the exceptions—proof that high yields today can mean high losses tomorrow.