Published: November 10, 2008
With sales of almost $50 billion,
Pfizer (NYSE: PFE, $16.86)
is the world's biggest drug maker in the $670 billon global
pharmaceutical market.
Because of the recent steep sell-off, the firm's share price has
retreated to levels last seen in the late 1990s and brought the
stock's yield to a very attractive range.
In recent years, Pfizer has consistently raised its dividend. It
paid $0.76 a year in 2005, $0.96 in 2006 and $1.16 in 2007. So far
this year, it has paid out $0.32 a quarter and is on track to
distribute $1.28 for the full year. At current prices, the company
is yielding 7.6%
($1.28/$16.86). That
is very attractive for a firm of Pfizer's stature.
The company is perhaps best known for its erectile dysfunction drug
Viagra, but it has numerous other blockbusters as well. Celebrex is
its well-known treatment for arthritis and Lipitor, the world's best
selling drug, lowers cholesterol.
Sutent, a treatment for cancer, and Chantix for stopping smoking are
two relatively new pharmaceuticals the company has high hopes for.
The cash cow, however, is Lipitor. The drug racked up $12.7 billion
in sales in 2007 and accounts for nearly 25% of revenues. However,
it loses its patent protection in late 2011.
Sixteen analysts follow the stock. They estimate the company will
earn $2.37 per share in 2008, with that figure rising to $2.50 in
2009. If their 2008 estimate is correct, the company's dividend
payout ratio is a sustainable 54% ($1.28/$2.37)
Trading at less than seven times projected 2009 earnings, the stock
is attractively valued. It is also changing hands at well under two
times its book value. As of the most recent quarter, Pfizer had more
than $26 billion dollars in cash on its balance sheet, or $3.88 a
share, meaning that it will not need to tap the financial markets
anytime soon. The company's global reach -- about half its sales
come outside of the United States -- is an added advantage that
shelters the firm from domestic weakness.
There are potential risks to Pfizer's story. The value of U.S.
prescriptions fell by about -2% in the second quarter of 2008. That
figure could accelerate in a severe downturn, although health care
is an essential service that should remain relatively
recession-proof.
Second, when cholesterol fighter Lipitor goes off patent, Pfizer's
sales and earnings could fall precipitously. There is no guarantee
they can replace 25% of their sales. Still, the firm has
approximately 100 drug projects in a fairly advanced state and
spends approximately $8 billion each year on research and
development. During the third quarter, for example, Lipitor sales
were off -13% in the U.S. but sales of Pfizer's new pain killer
Lyrica surged +45% from a year ago.
Finally, the drug giant is consistently facing litigation over the
side effects of its products. Protracted lawsuits can be both
distracting and expensive.
It's encouraging, though, that the company recently settled most of
the lawsuits over its two pain relievers, Celebrex and Bextra. The
settlement triggered a pretax charge of $894 million to
third-quarter earnings, but the company still managed to make $0.34
per share (including extraordinary items), tripling earnings of
$0.11 a share from a year ago. Excluding special items, Pfizer
earned $0.62 per share, +7% more than the year-earlier period, as
the drug maker controlled costs and benefited from the weaker
dollar.
The stock is presently attractively valued. It offers moderately
conservative investors a rich yield of nearly 8%, which appears
safe at least through 2011 when Lipitor goes off patent.
Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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