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By Michael Barton

Pfizer Inc (NYSE:PFE) shares are currently trading around $18.50, in the middle of their 12-month range of $16.25 to $21.45. Its last 12-month earnings per share of $1.44 places its shares on a trailing price to earnings ratio of 12.81. This compares on the low end with competitors Merck (NYSE:MRK) at 24.24, Bayer (OTCPK:BAYRY) at 18.57 and on a par with Novartis (NYSE:NVS) at 12.17. It also compares below the current S&P 500 price to earnings ratio of 19.38.

Year-on-year quarterly revenue growth for its last reported quarter showed an increase of 7.50% on the respective period last year, with an operating margin of 27.79% leading to a profit margin of 16.66%. It has cash on its balance sheet of $28.98 billion, with a debt position of $41.05 billion. Cash flow of $21.24 billion means that its debt to equity ratio of 45.35 is easily managed.

At the current share price, PFE shareholders benefit from a dividend yield of 4.3%. The company has paid dividends since 1901.

Recent news has been positive, giving substance to market estimates of earnings per share for its next full year (ending December 2012) of $2.31. PFE has a steady, almost daily release of news about its drugs and the company in general. There are too many to mention here, but here is just three that caught my eye:

  1. The company continues to grow organically and by acquisition. The latest acquisition is Excaliard Pharmaceuticals, a company that includes products for the treatment of skin scarring nearing commercialization.
  2. Its stream of drugs continues to receive approval worldwide. Vyndaqel has recently been approved by the European Union.
  3. In August, the US Food and Drug Administration approved XALKORI as the first and only therapy for locally advanced-cell lung cancer.

The big biopharmaceutical companies, like PFE and MRK, spend billions on research and development, but have products that generate huge revenue streams. As such, growth and share price performance is often unexciting. They firmly fit the descriptive "defensive stocks," and they reward shareholders with solidity of performance and some great dividends.

PFE is set to continue in this vein. News and fundamentals look good, and the chart backs this view. Shareholders have outperformed the S&P 500 Index through the last twelve months, and after steep falls in August as the market headed abruptly south the share price is recovering nicely.

The shares trade on an undemanding forward price to earnings ratio of 7.99, and offer a dividend that is covered 1.8 times by its earnings. If earnings hit expectations of $2.31 next year, which I think they will, there will be plenty of room for the company to increase this dividend further in 2012, which will underpin further strength in the share price.

I believe that the median 12-month share price target of $23.36 prevailing amongst stock analysts may be on the low side, particularly in a market that is likely to come under further pressure from global economic woes. For dividend and earnings prospects, PFE is a top-quality defensive that will attract investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Pfizer: Undervalued And A Potential Dividend-Booster