Is Pfizer's Yield Worth It?

pfizerPfizer (PFE) is an enormous company with approximately $52B in sales per year, $12B in profit per year, and $180B market cap. The company has a large stable of prescription medications such as Lipitor, Norvasc, Zoloft, Viagra, Celebrex and others.

Lipitor is the number one selling prescription drug worldwide with over $12B in sales. Pfizer also has a gigantic research effort, spending several billion dollars per year to bring out more prescription medicines. Also, as seen by the purchases of Warner-Lambert and Pharmacia, Pfizer is willing to buy other companies to expand its product portfolio. Additionally, PFE often buys the rights to compounds being tested by much smaller companies.

The company’s finances are rock solid with over $12B in cash on hand, a total debt of $8B, and a cash flow of over $17B. The company also pays a healthy dividend, which will increase 21% to $1.16 per share, yielding about 4.5% at the current stock price. Looking at the chart below an investment in PFE in 1970 would have returned over 3,000%. A more recent investment in 1990 would have returned over 2,000%. Although, the past several years have been poor with an approximate 3-year annualized return of -6.9% and an approximate 5-year annualized return of -5.9%.

The company has several negatives. Recent sales growth is non-existent as the approximately $50B of sales this year is only $5B greater than in 2003. Competition is also becoming more intense as pharmaceutical companies produce increasing numbers of “me-too” drugs, meaning drugs that treat the same disease or symptom as ones already on the market. Generic pharmaceutical companies are also becoming more aggressive in their lawsuits to break patents. In the past few years Pfizer had to defend Lipitor and Norvasc, albeit successfully.

Pfizer also sold their successful consumer healthcare division, which was a mistake. Analysts loved this deal since many believed Johnson & Johnson (JNJ) overpaid at a sale price of $16.6B. Selling a poorly performing division makes sense but Pfizer lost a cash cow with great brands such as Listerine, Lubriderm, Nicorette, Sudafed, Zantac, Rogaine, etc. which had $3.9B in sales.

Pfizer is now almost purely at pharmaceutical research company. This is a riskier proposition that is dependent on a successful research effort and legal defense of patents. The high dividend may not be enough to wait and see what Jeff Kindler, the new CEO will do.

source - SeekingAlpha