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Pfizer

The Market is Presenting Growth & Income Opportunities

May 26, 2010 By 1 Comment

A Growth Play

As I wrote about in a previous post, Buffalo Wild Wings (BWLD) would be an attractive stock to buy in the mid 30′s. Buffalo Wild Wings is entering buy territory with shares of the chicken wing chain now selling at $35.87. Shares could potentially drop to the low 30′s because small caps get hit the hardest during market corrections. If so then it would be a great opportunity to buy a solid small cap franchise with a great balance sheet and good future growth prospects for 15 times next year’s earnings.

An Income Play

The pharmaceutical industry is home to some of the best income generators in the market. Dividends help improve investment returns especially during choppy markets like the one we are in now. Pfizer (PFE) has entered buy territory with shares trading at just $15. Pfizer is a buy purely for the dividend yield alone. The stock is currently paying a 72 cent dividend which equates to a 4.7% yield. The dividend will likely increase in the future as the current dividend payout is just 31% of next year’s earnings. This is relatively low compared to other pharmaceutical companies which have dividend payouts over 40%. Eli Lilly has a payout of 44% and GlaxoSmithKline 48%. Merck is currently paying out 39% and there are rumblings of a dividend increase. Pfizer is no longer the growth stock that it once was. As a mature cash cow, Pfizer will likely have to increase its dividend again to satisfy investors.

Although Pfizer trades at just 6.6 times 2011′s earnings, growth is expected to be anemic with the 5 year growth estimate barely above 2.5%. This is purely an income play. Investors looking for greater capital appreciation with dividend income should take a look at drug stocks Merck, Eli Lilly, and GlaxoSmithKline. These stocks are currently yielding 4.8%, 5.9%, and 5.6%. They do however trade at slightly higher multiples than Pfizer.

Filed Under: Investing Tagged With: ,

Pfizer’s Puzzling Move

January 27, 2009 By 2 Comments

Pfizer(PFE) has agreed to purchase Wyeth(WYE) for 68 billion dollars in cash and stock. Wyeth is the 12th largest pharmaceutical company whose main strength is in its consumer products division. Some of Wyeth’s best known products are Advil, Chapstick and Robitussin. This move is puzzling because Pfizer sold its own consumer products division to Johnson & Johnson in 2006 for 16.6 billion dollars. Pfizer was moving away from diversification back in 2006 and focusing solely on its prescription drug business. Now it looks like Pfizer is abandoning a strategy that it just adopted 3 years ago.

While adding Wyeth will improve cost savings for Pfizer, it still does not address Pfizer’s core problem of a dearth of new drugs in the pipeline. Pfizer will find it difficult to replace the revenue that will be lost from the patent expiration on Lipitor. Lipitor accounts for about 25% of Pfizer’s total revenue and the patent is set to expire in 2010. Patent expirations of Norvasc and Zoloft have hurt Pfizer’s earnings over the past few years. According to an Associated Press story, analysts such as Steve Brozak of WBB Securities believe that the deal still doesn’t solve Pfizer’s long-term problem of not having enough promising drugs in its pipeline. “The question becomes what are they going to do to fill that research gap,” Brozak said.

Investors seemed to disagree with the deal as the stock sank 10% today to $15.65. It seems as if Pfizer may be overpaying for Wyeth. It’s a solid company but they are paying too much for Wyeth in a tough economic environment. Pfizer is paying a 30% premium for Wyeth and taking on 22 billion in debt. To complete the 68 billion dollar deal, Pfizer will pay 33 dollars in cash and issue .985 shares of stock.  Pfizer may face a ratings downgrade due to the additional debt levels that the company is adding. Pfizer is also slashing the dividend in half to .64 per share. This punishes the many investors who were attracted to Pfizer’s stock for the consistent dividend increases.

Pfizer’s core comeptence is as a drugmaker. The acquisition of Wyeth will boost revenue over the next few years but it does not solve the growth issues long term. Pfizer need to hope that Wyeth’s biologics drugs can reignite Pfizer’s dwindling drug pipeline. If not Pfizer will remain a company with slowing growth whose dividend now appears to be average at best.

Photo by colros

Filed Under: Finance Tagged With: , ,