Wednesday, May 16

Another Health Stock - PFE

Someone suggested PFE in the comments and I decided to take a look. What I found was very interesting!

PFE (Pfizer) is a US-based company with huge international presence that mostly seems to make drugs. All the analysis on it is basically looking at the future earnings of this or that drug. In Canada, the big name that I am familiar with is Celebrex, but there are other big ones as well. Important news often concerns patents as with a recent ruling that protects Celebrex until 2010 from generic competition in Canada.

The company has a 0.10 debt to equity ratio. This is really low! It is like having 90% equity in your house and only a 10% mortgage (sort of). So from that perspective, the company is in great financial health because earnings aren't being used to pay debt so they can go to shareholders.

Why do I care about stocks right now though? Dividends, of course! And PFE certainly satisfies this criteria. Current yield is 4.29% with a 5 year dividend growth rate of 16.89%. These are awesome numbers. I looked further back and saw at least 10 years of consistent dividend increases.

The P/E ratio is 18.90 which is a bit expensive, but the forward P/E is 12.70 which is really good (if the analysts are accurate, which we know is a bit of an assumption).

So why do I call this stock interesting instead of WOW? Well, the charts look scary. The stock price has been going sideways since Jan 2005 but this range takes it back to 1998 levels. It's been in a downwards trend pretty much since Jan 2000. (I wasn't able to find a good chart to post, but look at it on MSN money and you will see what I mean.)

All of this leaves me sort of shaking my head. How does a company stay out of debt while paying out huge dividends (payout ratio is in the 70% range) unless it's very profitable? And yet everyone seems worried about PFE's earnings. I just don't get it.

So if you believe that you need to be a contrarian to succeed at investing, perhaps this is the stock for you. I find it very intriguing, and I love the yield, so I may succumb after giving it further thought, but right now I'm still puzzled by this apparent contradiction.

Remember to do your own research before investing in anything!


d2cold said...

If you believe in the boomers 'moving' markets then Pfizer will should do well in the not too distant future. If you want to see a scary chart see QLT-T! Only thing it has going for it is a low P/B but thats because its patents are all coming off soon. Also noted that you said Pfizer has gone sideways the past few years.. But all the money has been flowing away to Mining & Oil and gas which should eventually cool off and people should come to there senses and buy good ol dividend machines like: MFC, PFE, BMO, etc. That was also why i suggested covered call writing. It should give you 1-2% every few months when the stock goes sideways add that to the yield and it earns 8-15%/yr going sideways. Its also a defensive play in this market like a JNJ-N or most CND banks. I liked PFE before, but now that my largest mutual fund holding(PHN) has it as its 6th largest holding it makes me feel that much better about it. After all professionals can't be wrong all the time right? The only thing i don't like about it is its in US currency..

DH said...

Pfizer is a tough call. I have it in my portfolio, and also a generic drug phama, Teva.

Pfizer's low valuation is reflecting the patent expirations of their branded drugs come 2010. Teva hedges that risk for me if Pfizer can't develop enough new drugs to replace their pipelines. I'm too nervous to add to my position in Pfizer.

mOOm said...

PFE hasn't been increasing earnings by much so I guess it must have recently upped the dividend payout rate in order to grow dividends in the way you say it has. And yes the 5 year average dividend payout rate is 2.6% according to Yahoo. There is no reason why they would need to increase debt to pay out 70% of profits. Just looking over the numbers I see a company like MSFT that was once a growth stock and has now matured into a dividend payer.

0xcc said...

I own PFE in my self-directed RRSP account and I think it is a good stock but there are some things that an investor needs to evaluate before buying the stock. The main thing is that it is a drug company. So in order to make money they need to spend a *lot* of money on basically a gamble that a specific drug is a good drug that will get the necessary approvals to sell to the public. There aren't a lot of drugs that make it through the whole approval process and predicting which ones will is next to impossible. So drug companies can spend a lot of money developing a handfull of drugs that never see the light of day. On the other hand, one blockbuster drug (say like Viagra which is a Pfizer drug) can make up for a bunch of failed drugs. One way for a big drug company like Pfizer to sort of hedge their bets on getting a good blockbuster drug though approvals is to buy a smaller company that has a promising drug in late-stage development. So watch for Pfizer (and other big drug companies like Merek and Lilly) to be buying up smaller companies.

Another blockbuster drug for Pfizer, Lipitor is getting close to the end of its patent protection life which has the potential to eat into a lot of Pfizer's revenue.

Investoid said...

The major worry about big Pharma stocks is that their drug pipelines are weak right now relative to what drugs will come off patent in the next few years. I haven't looked too much at Pfizer myself, but I suspect this is at least one issue.

Another issue is the litigation risk they face for some drug that ends up causing major health problems after it's been FDA approved. Vioxx and Celebrex were two major catastrophes for their producers due to the lawsuits that have piled up.

This is a very capital intensive business, since so much money has to go into R&D to produce the next blockbuster. The street's worried that it will be small biotechs that will lead the next wave of innovation, not big pharma.

Still, this could be an excellent value play. You really need to look into its drug pipeline (current and future) to understand the likelihood that earnings will stay steady or increase, and not decrease dramatically when generics start eating away at its market share.

Thicken My Wallet said...

I own PFE as well. Pharma has a structural issue right now- most of the industry is trying to swing for the fences and get that one mega drug (like Viagra) into the market. When the markets do not see anything big in the pipeline, they tend to punish the stock.

The market also disagreed with PFE's recent strategy to cut back sales staff when they hit a set-back when they hit a R&D bump recently.

However the demographics work in the company's favor and PFE is one of the biggest players in the marketplace.

Mr. Cheap said...

I was really excited about PFE and GM about a year ago, but what scared me away from PFE was exactly what everyone is commenting on here, patents running out and no blockbusters in the pipeline. Why take the risk for a 4.3% dividend when BMO is at 4% and has a far more dependable future?

Philbert said...

All good points made above. I also own Pfizer. However, there are many question marks hanging over this company. It basically comes down to the fact that they do not have much in the way of blockbuster drugs like Viagra, Lipitor or Celebrex in the pipeline. I believe the reason they raised their dividend recently was to help support the price of their shares. I still like Pfizer, but new investors should be wary.

Gwaine said...

What freaks me out about Pfizer is the amount of money the top execs are making. Maybe this is normal, I don't know, but they seem to have an obscene amount of stock options and are making millions of dollars. I don't have a problem with execs making a ton of money if they turn an ailing company around and are achieving great performance. But I wouldn't classify Pfizer's performance over the past few years as stellar so I don't think they should be rewarded with all those options.

Looking at the history of insider transactions it seems there is a trend of selling. Maybe I'm being naive, but if execs thought a company was going to be doing really well wouldn't they be buying?

Here's where you can see the insider transaction history:

S. B. said...

As you probably know, PFE grew rapidly for a number of years, in part due to acquisitions. Lately, they have been hurt by the COX-2 debacle, a lot of research that didn't pan out, and perceptions of a changing political environment in the U.S. Most of that is already reflected in the price.

In the medium term, the really big problem is the coming patent expiration for them in the next five years -- especially Lipitor, which has absolutely gigantic sales. When the Lipitor patents expire in 2009/2010, PFE will stand to lose $12B/year in revenue (or possible even $15B/year by then). This is roughly 1/4 of their revenue.

Longer term, there are strong demographic drivers and yes, they are very well capitalized. Do the longer term prospects outweigh the medium term issues? It is a close call, but I'm willing to take the bet at these levels.

JNJ...PFE...are you getting your ideas from my nav bar? :-) Or are you just front-running Buffet's purchases... :-)

moneygardener (AKA investor99) said...

I agree with Mr.Cheap. No growth makes me want a higher yield. Maybe like a Rothmans over 5%.

the money diva said...

I see all this discussion as confirmation that the signals on this stock are not clear. There are a lot of excellent points in here, including some that I was not previously aware of. Thanks for all the input; I think I will be holding off on PFE unless it gets beaten down further.