At first glance, the multi-month drop in Pfizer (NYSE:PFE) appears to offer an opportunity. After all, the dividend is back to a respectable 3.5%.
When reviewing the big picture, the question is whether buying the stock below $34 is ideal. One needs to consider that the stock traded below $30 earlier this year and the big rally was in part based on the expectation of a company split that now isn't going to occur.
Without the split, Pfizer is back on course to earn this year in the range of $2.43 per share, at the mid point of guidance. One needs to consider that guidance assumes an 11% growth rate, but analysts only forecast 5-year targets of 6.5%.
The recent drop in the stock is maybe best kept in perspective by the net payout yield. The company has a stock buyback plan in play, but the amount spent is typically not substantial in context with the market cap at $204 billion.
Earlier this year, Pfizer approved a $5 billion accelerated stock repurchase, but the typical amounts spent on a quarterly basis aren't jaw dropping. Even with the stock down some 9% since the July peak, the net payout yield that combines the net stock buyback yield and dividend yield is only around 6%.
PFE data by YCharts
The stock definitely hit a buy point when the yield was closer to 7.5%. Otherwise, one needs to remember that if the future was bright and the stock was cheap trading at roughly 12x EPS for 2017, why not buy all the stock possible?
Remember that Pfizer itself questioned the value by purchasing Medivation (NASDAQ:MDVN) for $14 billion. The deal was all cash that Pfizer could've easily used for stock buybacks. As well, the deal is forecasted at $0.05 accretive that sounds impressive, but a minimal 2% share reduction would have the same impact without the integration issues.
The top yielding stocks in the market return capital at rates in excess of 12% of the respective market caps.
The key investors takeaway is that Pfizer is a stock worth watching. The stock isn't expensive by any accounts, but the catalysts for outperforming the market don't exist either. As well, the big rally off the lows could lead to some more downside in the short term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
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