Investment Thesis
Pfizer Inc (PFE) is one of the world’s largest pharmaceutical firms with sales exceeding $50 billion. The company is currently attractively valued at a blended P/E ratio of 13.3, offering a current dividend yield of 4%. Pfizer is awarded an S&P credit rating of AA and possesses a modest debt to capital ratio of 28%.
Prior to 2004, the company could have been described as a fast-growing dividend paying stock. However, since 2004, operating earnings growth has slowed considerably. Therefore, Pfizer was once a powerful total return producer that has morphed into a high-yielding blue-chip dividend paying stock offering only moderate growth potential and an above-average current yield.
Consequently, I believe that Pfizer is best suited for the prudent income-oriented investor seeking above-average current yield and safety. Therefore, Pfizer might be especially interesting to the retired investor looking for an above-average level of income in order to fund their retirement needs. However, I also intend to demonstrate that capital appreciation potential might also be surprisingly good going forward.
Pfizer It’s All About The Dividend
I recently read an excellent article titled “Pfizer May Be Another IBM” that DoctoRx authored on Pfizer, and thought it was an excellent piece of research on the company. However, there were certain areas of the article that I did not agree with. To be clear, I found that the article contained some excellent insights into some of the company’s past problems, as well as a rather deep look into aspects of their current pipeline. However, the article did not alter my views of the company relative to its current valuation and/or the long-term opportunity for investment that it offers. On the other hand, much of what was written did describe the slowdown in growth that I referenced above.
For example, I disagree with the author’s position that refers to adjusted (operating) earnings as fake earnings. I disagree with that assessment on the following basis.
Diluted or GAAP earnings, which DoctoRx apparently considers his favorite earnings metric, do tell you a lot about the company’s accounting, and in that regard, when I am examining a company I always check diluted earnings as an integral part of my research and due diligence process. However, I rarely utilize GAAP earnings to make either valuation decisions or to make decisions regarding the viability of the company’s dividend paying ability.
The problem with GAAP earnings are that they often include nonrecurring and/or non-cash charges against earnings that have little or no effect on the company’s actual current cash flow. To my way of thinking, cash flow is the most relevant metric relating to dividend sustainability. In my opinion, Pfizer has ample cash flows to continue paying and growing their dividend.
DoctoRX stated the following in his summary: “PFE reported another year in which it did not quite earn its dividend.” Although this is true on a GAAP basis, it is not true when utilizing adjusted operating earnings (so-called fake earnings) or cash flows. Nevertheless, he was technically correct on the basis that he presented it. However, I do not believe that GAAP earnings provide a clear picture of how the business is actually performing on an operating basis.
But perhaps most importantly, and I am simply summarizing my views here, his article was – in my opinion – oriented towards a total return investment. As I will cover extensively later in the video presented in this article via FAST Graphs, I do not believe that Pfizer will necessarily produce market-beating capital appreciation going forward. However, I am not primarily looking to Pfizer as a total return investment. Instead, I’m looking at it as a reliable high-yield dividend paying stock relative to the average company. My attraction is the 4% dividend yield and a relatively high level of confidence that it will grow moderately going forward.
Your Benchmark Should Be Your Investment Objective
As an aside, consider why investors traditionally invest in fixed income or bonds. These investments are never made with the expectation that they will produce high or the highest total returns. Instead, they are made because investors expect a predictable and stable yield or interest payment going forward. Not all investments are about making the most money. If that were true, growth stocks would be the only logical choice.
On the other hand, if current spendable income were your objective, growth stocks would not make a lot of sense. With a growth stock, you are totally at the mercy of the company’s price action. If you were harvesting shares in order to generate income, a down market could have devastating effects on your long-term future. In other words, you could be required or even forced into selling stocks for less than they are worth, and as a result, selling more shares than you should in order to meet your income needs. In other words, you could find yourself unnecessarily depleting your principle.
In contrast, with a dividend paying stock that has a history of raising its dividend, you could find yourself in a down market and still see your income increasing. The act of harvesting your dividends has no impact on the number of shares you own. But more importantly, you could ignore a temporary down market because you are continuing to receive the income that you need from the dividends. The price of the stock has no bearing on your dividend income stream. Dividends are paid on the number of shares you own and not the price per share.
Therefore, I believe it makes more sense for the dividend growth investor to measure their performance based on the income they are receiving from dividends. More directly stated, your benchmark might not be the goal of outperforming the overall market on a total return basis. Instead, your more relevant benchmark might be comparing how much dividend income you are receiving in comparison to the general market. As I will show later, Pfizer has consistently produced more dividend income than the S&P 500 – even during its recent low-growth phase. I will illustrate this more fully in the video portion of this article.
About Pfizer
The following short business description Courtesy S&P Capital IQ describes Pfizer’s businesses:
“Pfizer Inc. discovers, develops, manufactures, and sells healthcare products worldwide. It operates through Global Innovative Pharmaceutical (GIP); Global Vaccines, Oncology and Consumer Healthcare (VOC); and Global Established Pharmaceutical (GEP) segments.
The GIP segment develops and commercializes medicines for various therapeutic areas, including inflammation/immunology, cardiovascular/metabolic, neuroscience/pain, and rare diseases.
The VOC segment develops and commercializes vaccines, as well as products for oncology and consumer healthcare. It provides over-the-counter products comprising dietary supplements under the Centrum, Caltrate, and Emergen-C brands; pain management products under the Advil and ThermaCare brands; gastrointestinal products under the Nexium 24HR/Nexium Control and Preparation H brands; and respiratory and personal care products under the brand names of Robitussin, Advil Cold & Sinus, Advil Sinus Congestion Relief & Pain, Dimetapp, and ChapStick.
The GEP segment offers products that have lost marketing exclusivity in various markets; and branded generics, generic sterile injectable products, biosimilars, infusion systems, and other products.
The company serves wholesalers, retailers, hospitals, clinics, government agencies, pharmacies, and individual provider offices, as well as centers for disease control and prevention.
It has licensing agreements with Cellectis SA and AstraZeneca PLC; collaborative agreements with Eli Lilly & Company, OPKO Health, Inc., BioRap Technologies LTD., Merck KGaA, Transgene S.A., Edelris SAS, IGNITE Immunotherapy Inc., and AbCellera Biologics Inc.; and a research and development agreement with the National Cancer Institute.
The company has a partnership with The University of Pittsburgh. Pfizer Inc. was founded in 1849 and is headquartered in New York, New York.”
The following excerpts from Morningstar’s analyst report titled “Cost-saving plans and recent product launches should help mitigate losses” illustrates Pfizer’s position and strength in the pharmaceutical industry:
“Pfizer’s foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company’s large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business.
Pfizer’s size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer, heart disease, and immunology.”
Morningstar also cites Pfizer’s powerful distribution network in conjunction with the above that support a wide moat. Therefore, even though recent historical growth has been less than exciting, Pfizer does produce strong cash flows supporting their dividend and this establishes them as a blue-chip dividend paying stock.
F.A.S.T. Graphs™ Video: Offering A More Comprehensive Look At Pfizer’s Dividend Paying Capacity
Summary and Conclusions
To conclude and summarize, I present Pfizer as an above-average yielding high-quality dividend-paying stock. In this regard, it fits my specific investment objective of above-average current yield with the opportunity to see that income increase over time. However, although I do not expect it to be a high capital gains generating investment, I do believe its current valuation, coupled with its expected future growth should produce a reasonable level of capital appreciation in addition to its above-average dividend income potential. Consequently, I offer Pfizer as a fairly valued blue-chip dividend paying stock worthy of further research and due diligence.
Disclosure: Long ETP
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Mar 4, 2017