Pfizer: Good To Go

| About: Pfizer Inc. (PFE)

Summary

Pfizer recently settled a decade-long case relating to its older treatments Celebrex and Bextra.

Assuming Pfizer’s settlement is in the range of related past settlements, there should be no long-term impact.

Considering Pfizer’s high dividend yield, solid balance sheet and strong forward outlook, we believe that dividend-focused investors don’t need to wait until it reports its second quarter earnings before buying.

Analysis

Pfizer Settles Celebrex and Bextra Lawsuits. Pfizer (NYSE:PFE) was in the news recently, finally settling a decade-long case relating to the cardiovascular risks associated with its blockbuster arthritis drugs Celebrex and Bextra. Terms were not disclosed but an earlier related settlement involving Bextra cost the company $2.3 Billion. For a company that's worth over $220 Billion that has close to $20 Billion in the bank, a similar settlement in this situation would seem like a proverbial drop in the bucket, but it does bear watching.

Looking ahead, Analysts are expecting Pfizer to report second quarter earnings of $0.62 a share, 11% higher than what it reported year earlier, on the back of nearly a 10% increase in quarterly revenue. Analysts are likely to raise questions about the Celebrex and Bextra settlement during Pfizer's next earnings call.

With the lawsuit settlement behind Pfizer, and the potential for strong quarterly results, we decided now was the time to evaluate shares to determine if it made sense for Dividend Investors. The answer was an unequivocal yes.

Dividend and Outlook. One of the preeminent defensive stocks among blue chips, Pfizer has been a steady play in 2016, rising 14% in the year-to-date. More importantly, the Pfizer's shares carry a healthy 3.26% dividend yield, which is among the highest yields for Dow Jones Industrial Average components and also more than double the yield for other pharmaceutical companies.

This means that investors who purchase $10,000 worth of Pfizer shares today can pencil in around $326 in passive income each year they hold the stock. Since 2009, Pfizer has raised its quarterly dividend by $0.02 each year, so that gives investors a fairly good idea of where the next dividend will land. Were Pfizer to increase its dividend to $0.32 per quarter by February 2017 (Pfizer's dividend increases in the last five years have come in February), investors who bought the shares today would see a jump in their dividend yield to nearly 3.5% - a very robust return for a blue chip stock.

In any case, Pfizer retains the good financial standing it needs to continue paying about $1.8 Billion a quarter in dividends. To wit, its financial strength ratios show that it carries $1.65 in working capital for every dollar of short-term liabilities. At the same time, Pfizer has only 62-cents of debt for every dollar of equity. This tells dividend investors that Pfizer will have no trouble covering its dividends. It's also worth noting that Pfizer's financial ratios are superior to that of the average S&P500 company.

As we mentioned, the specifics on the Celebrex and Bextra settlement are still scarce but if it does come up to the $2.3 Billion level of its previous Bextra settlement, it will impose a modest drain on Pfizer's resources. However, it should have little impact on Pfizer's ability to pay dividends given the fact that the company generated nearly $15.5 Billion in operating cash flow in the 12-months to March - an improvement over the $14.5 Billion it generated in 2015. Assuming Pfizer's operating cash flow remains in the $15 to $16 Billion range and the entire settlement is due immediately (which is unlikely; this is a negotiated settlement, not a fine), the company will still have the wherewithal to pay a $1.8 Billion quarterly dividend.

Looking ahead, Pfizer remains in a good position to sustain (and increase) its dividends. To wit, it saw double digit growth in all its Innovative Product segments, the integration of Hospira is now expected to generate $1 Billion in cost savings by 2018 and the company raised its both its revenue and earnings guidance for all of 2016. Pfizer also received good news when the FDA approved its Remicade biosimilar Inflectra in April, although the company is bracing itself for a fight with Johnson and Johnson (NYSE:JNJ) as the latter predictably filed a case against Pfizer (through Hospira) and Celltrion for patent violations.

Wall Street shares our sanguine view: analysts are forecasting that Pfizer will see its revenues growth by 7% a year over the next half-decade - a considerable improvement from the flat growth it registered in the preceding 5 years. Treatments such as Pfizer's breast cancer treatment Ibrance and (possibly) Inflectra are expected to lead this growth. It also has a number of potential blockbusters in its drug pipeline such as its lung cancer treatment Avelumab.

For dividend investors, the small fly in Pfizer's ointment is that it's currently trading at 30-times its trailing earnings - a considerable premium to the trailing Price-Earnings ratios of the both the Dow and S&P500. A closer look shows that this criticism just doesn't hold up: on a forward-earnings basis, Pfizer is trading at just 14-times - a discount to the forward estimates for the two major market indices. What's more, Pfizer is trading at roughly 4.8-times its future sales revenues - less than the 5.3-times of its competitors. Finally, Pfizer is trading at only 3.6-times its book value whereas its industry as a whole is trading at nearly 18-times. Pfizer is only expensive under the narrowest of definitions. On a forward-looking basis, Pfizer is reasonably cheap.

Conclusion

While some investors may wish to wait until Pfizer reports its second quarter earnings before buying its stock, we don't see the need: the stock is good enough to buy today. Pfizer's combination of a high - and potentially rising -- dividend yield, solid balance sheet, strong prospects from its pipeline of drugs and treatments and relatively attractive forward valuation metrics make it an essential buy for any dividend stock portfolio.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PFE over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.