Owning Pfizer’s (PFE) stock is a lot like owning a fixed income security. The stock has been stuck in a trading range for years and has been unable to harness much momentum. Many investors have lost faith in the company because they are tired of the low returns. While Pfizer might not be appropriate for the portfolio of growth investors, the company might be attractive to an investor looking to make some dividend income. Let’s take a look at a few of the pros and cons of investing in Pfizer.
The question of earnings growth
Pfizer may have waved goodbye to double digit earnings growth years ago but the company still has single digit earnings growth. Pfizer just reported earnings for the current quarter and was able to increase its bottom line profits 5.5%. The company benefited from its recent acquisition of King Pharmaceuticals and lower tax charges.
Pfizer is starting to feel the impact of increased competition from generic drugs in the United States. The drugmaker saw its revenue decline 1% and is starting to feel the impact of the patent expiration of many drugs. There is also growing concern about lower overall revenue facing the healthcare industry. Lower federal spending and a depressed economy could hinder the revenue of many pharmaceutical companies.
The company has been gearing up to become a much more efficient and leaner drug company. Pfizer has been selling off many divisions that do not blend with the company’s new operating strategy. This has helped to increase the company’s cash hoard and reaffirm its strategic focus.
Pfizer’s future will be largely shaped by the drugs that the company launches over the next few years. Pfizer is betting big on some drugs in early stage development becoming billion dollar cash cows like some previous drugs were.
The attractiveness of the dividend
The main attraction for Pfizer investors is the dividend. Pfizer has a 4.2% yield right now as the stock is trading at $17 per share. No matter how long it takes the company’s stock price to rebound, investors are being paid handsomely to wait. Even in a difficult earnings environment, Pfizer has enough cash on hand and free cash flow to boost its dividend payout. The balance sheet is the strongest part of Pfizer.
Pfizer’s dividend had been a lock for an increase for 40 straight years. The company cut its dividend for the first time two years ago when the markets were collapsing. Now the company is back in dividend growth mode having increased its dividend last December. That does not make up for the dividend cut of 2009, but it is a clear sign that the company is confident about its earnings.
The current dividend payout rate of 70% looks high based on last year’s earnings but it is actually mild when you factor in this year’s earnings. Pfizer earned 60 cents this past quarter and is expecting to earn more than $2.25 for the full year. That drops the firm’s annual payout rate to just 35%, which is clearly sustainable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.