Pfizer Setback Disappointing, Not Catastrophic
By Chad Brand of Peridot Capitalist
I was actually planning a broader pharmaceutical post , but in light of the Pfizer (PFE) news over the weekend, I just wanted to talk about them a bit first. Peridot has a small holding in PFE, and will not be selling into today’s weakness. My bias would be to buy more, not sell. The news that the company is abandoning its lead cholesterol-fighting compound is obviously hardly a positive development. However, despite losing a key drug in its pipeline, the reasons I like Pfizer have not changed dramatically with this news.
Pfizer still trades at the lowest multiple in the big pharma group. Investors can certainly argue that such a price is warranted given the issues with their development pipeline, coupled with the fact that they are projecting flat revenues for 2007 and 2008. That said, once growth resumes in 2009 and beyond there will be outsized upside potential with such a depressed stock price. The bar will be set quite low when business begins to turn.
The stock is down more than 10 percent today to $24 per share. The current $0.96 annual dividend puts the stock’s yield at around 4 percent. I would expect a dividend increase to be forthcoming. A boost of 15% or more (to at least $1.10 per share) equates to a 4.6% yield, which is more than that of a 30-year U.S. treasury bond.
A floor on the stock due to the large dividend is not the only reason the shares are attractive at $24 each. Investors should expect accelerated cost cutting measures by management, increased share buybacks to appease upset investors, as well as an increased focus on M&A to boost their product pipeline. These moves will be largely received well on Wall Street, as they will allow the company’s earnings per share to hold up well (and even grow) for the next couple of years until new products can fuel larger growth in the drug business.
With the stock yielding 4 percent and trading at 12 times earnings, the downside for PFE is limited. Don’t get me wrong, this is a longer term play. The stock is not going to $30 overnight. However, the stock will pay you like a long-term bond while you wait for the picture to improve, and if some new blockbuster drugs do come to market over the next several years, there is no reason to think the stock could not reach the 40’s again. Add in the dividend payments and this defensive healthcare play could meaningfully boost portfolio returns over that time.