Pfizer Stock: Value Trap?

Pfizer, Inc. (PFE) engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide.

The company is a dividend aristocrat as well as a component of the S&P 500 and Dow Jones Industrials indexes. It has been increasing its dividends for the past 41 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 1.1 % to its shareholders. The stock has lost more than 63% from its all-time-high of $50 in 1999, however.

 

 

 

 

 

 

 

 

 

 

 

 

At the same time the company has managed to deliver a 3.60% average annual increase in its EPS since 1998. Pfizer faces many problems, including the fact that almost fifty percent of its US drug revenues will face patent expiration after 2011. The drug Lipitor for example, which accounted for more than a quarter of PFE’s sales in 2007 loses its patent in 2011. Although management spent $ 8.3 billion on R&D in 2007, there haven’t been any blockbuster drugs which will easily replace the ones that face generic competition after 2011-2013. Click to enlarge:

 

The ROE has decreased over the past ten years from a little over 49 % in 2002 to a little over 11% by 2007. Click to enlarge:

 

Annual dividend payments have increased over the past 10 years by an average of 17.70% annually, which is significantly above the growth in EPS. An 18 % growth in dividends translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1982, PFE has actually managed to double its dividend payment every five years on average.
Future dividend increases in dividends in the rate of 17% annually will be harder to obtain however, unless the company finds new drugs that it could use to generate more revenues. Click to enlarge:

 

If we invested $100,000 in PFE on December 31, 1997 we would have bought 4024 shares (Adjusted for a 3:1 stock split in July 1999). In February 1998 your quarterly dividend income would have been $ 255. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1412 by November 2007. For a period of 10 years, your quarterly dividend income has increased by 358%. If you reinvested it though, your quarterly dividend income would have increased by 454%. Click to enlarge:

 

 

The dividend payout has fluctuated greatly between 20% and 110% over the past ten years. At the end of 2007 the payout stood at 99%, which is very high. Even if EPS for 2008 reaches $2.00 the DPR will still be high at 64%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. Click to enlarge:

 

PFE currently spots a P/E of 16.70, a high dividend payout ratio and a very high yield of over 7%. On the surface, PFE does appear cheap, but in my opinion it could be a value trap for investors. Until management starts producing new drugs either through acquisitions of competitors or by creating the drugs, PFE will continue to be a losing proposition. Even though management has tried to cut costs by closing several production facilities, the major problem that PFE faces is uncertainty about the source of future revenue streams for the company. Given the stagnant EPS and the expected major revenue decreases after 2011, I doubt the sustainability of PFE’s future dividend increases.

The company should continue as a going concern in the future however, given the fact that 50% of its sales come from abroad and its ability to cut costs.

In addition, because of PFE’s current strong cash flow position I believe that the company does have the ability to buy new drugs by acquiring other companies and grow its revenues. The fact that twelve out of eighteen analysts rate PFE as “hold”, which is Wall Street’s jargon for having a sell recommendation on the shares, could be a potential contrarian sentiment indicator.

In the end I would consider initiating a PFE long myself when the payout is less than 50%. Until then, this big pharma stock will only have place on my watch list.

Disclosure: I do not own shares of PFE

Comments

[johndough110]

Rumor is that PFE will buy KG thereby locking the abuse deterrent market with KG's alliance to Acura Pharmaceuticals and Pain Therapeutics. With billions in the bank PFE has the cash to buy this entire market segment which will be HUGE.

[MD]

With a solid balance sheet and huge cash flow and reserves, Pfizer can participate in whatever the next big drug category will be. The dividend isn't going anywhere - payout of free cash flow is high at 80%, but don't forget share buybacks (which lower total dividend payout) and the fact that it's one of only 8 companies with a AAA debt rating. R&D is a numbers game, and nobody has the scale of numbers that Pfizer brings to the table.

Steve
magicdiligence.com

[DividendGrowthInvestor]

In my opinion the billions of dollars which PFE spent buying back stocks should have been spent acquiring other companies and new products. PFE has spent about 20 billion in total over the past 4-5 years buying back stock- if it had bought another company for 10-15 bln in cash and then bought back 5-10 bln in PFE's stock back, shareholders would have had a brighter future ahead.

They are a cash machine right now, but where will the cash come from after most of its current drugs start facing more generic competition?

[morgan77]

Great Article-, but I believe that PFE is a safe buy right now.
There may be some pipeline issues but I'm comfortable with PFE because of their history..
PFE has a flawless 41-year history of dividend growth and stands to benefit big, along with the entire drug industry as Medicare Part D kicks in over the next few years.
Here's an article by PFE supporter if you're interested in the dividend and management.

www.greenfaucet.com/tr...

[techy]

i would like to add that yes PFE may have not been a great investment in the past...due to its 63% slide since 1998.

but that 63% slide has made sure that there will not be much slide in future.....its true that a stock does not go up until many people take interest because of some fan following....but till then we can comfortably reap the dividends.

the only worry i will have about dividend stocks is: can the company stop dividends?? or will the company go bankrupt?? both is a big NO for PFE.

with the huge pile of cash i dont think they need to cut down dividend.

but its possible that their cash flow may slow down going forward....but that event is going to happen in 2010/2011, till then i will have earned enough in the dividends and selling calls.