Globally known as the world's largest drug maker, Pfizer (PFE) leads a set of drug manufacturing companies in one of the most profitable industries. The industry boasts one of the highest levels of dividend yield as illustrated by the list of companies assessed in this overview. So what exactly do you need to know in order to add a med stock to your portfolio? Well, you are in the right place right now as I will take you through some of the analytical overview of pharmaceuticals companies in the U.S. Using the example of Pfizer along with Merck (MRK), Novartis AG (NVS) and Sanofi (SNY), will be enough to prove to you why this industry holds the key to a healthy portfolio.
Brief Analytical Review of Pfizer and Competitors
Investors have one term in common when it comes to choosing their stock. They will always ask about the value of the stock, otherwise known as the intrinsic value. However, the word value has another more sophisticated meaning in stock investing. This is attached to a class of investors who call themselves value investors. This means that their interest depends on the current status of the stock and therefore they aim to obtain significant gains from a short period of investment. This means looking at whether the stock is overvalued or undervalued so as to short or buy the stock respectively. While there are several methods to assess this, one of the easiest and most common is looking at the dividend yield.
Pfizer enjoys an excellent dividend yield of 4%, which results from a dividend rate of $0.88 per share. This is a very lucrative yield for the value investors. The high forward annual dividend yield coupled with a very low rate means that the stock price is bound to rally, a situation that is likely to attract investors with a view of gaining significantly in the short term. Merck enjoys a dividend yield of 4.40% at a rate of $1.68 per share. If you assess carefully, you will realize that Merck has a dividend rate that almost doubles that of Pfizer, a statistic that is not matched in terms of dividend yield. Consequently, Novartis has a dividend rate of $2.48 resulting to a forward annual yield of 4.60%. Yet again, the dividend rate is almost three times that of Pfizer; while the yield is nowhere close to that. On the other hand, Sanofi's dividend rate of 1.76 perfectly doubles the dividend rate of Pfizer, which means Sanofi's forward annual yield should be something in the region of 8.00%, but on the contrary, it is only 4.90%. So then, do I need to explain further that Pfizer is technically undervalued?
An assessment of the company's operations indicates that Pfizer has the best management team as illustrated by the operating margin. The company boasts an operating margin of 29.32%, with the rest pegged below 22%. For instance, Merck is the closest to Pfizer but with only 21.99% operating margin. On the other hand, Novartis claims 21.49%, while Sanofi was second from last with 21.73%. However, when we assess the profit margins, statistics change, with Sanofi taking the lead at a profit margin of 16.24%, and Novartis coming in second with 15.35%. Pfizer had a profit margin of 14.85%, while Merck this time had to assume the last position with only 13.05%.
This indicates that Pfizer is the most geared company and hence pays more interest expense albeit at manageable levels. This is very evident from the debt-to-equity ratios of the four companies. Pfizer has a debt-to-equity ratio of about 47.16 with the rest averaging about 30, apart from Sanofi, which has 27.43. With this level of debt, I feel that Pfizer still has the best as this helps in balancing the cost of capital toward achieving the optimal cost of capital.
You can never be done assessing a stock without looking at the risk involved in investing in it. Well, in investment, we all understand that, the more risky a stock is the more returns you should expect and vice versa. However, people tend to assess the stock from the negative point of view when looking at the risk, thereby forgetting the second part of this rule. Ideally looking at more risky stock means anticipation for high returns and that is what Pfizer is offering you. With a beta of 0.61, only Sanofi could report a 'better beta' as per the law of finance of 0.98, a near perfect match to market risk. Merck reported a beta of 0.30, while Novartis had a beta of 0.47 in relation to market risk premium.
News Headlines that Raised the BP of this Med Stock
Intellectual property is one of the best things that ever happened in the world of business. I cannot imagine a business environment without this important copyright tool that ensures copycats are kept at bay. Nevertheless, loopholes remain that have not once, but severally exposed the intellectual property rules and regulations. Pfizer does indeed find itself a victim of such, following the recent infringement of its purported Roxane Laboratories registered to market generic copies of the lung cancer drug, Turceva, originally produced by Pfizer in conjunction with OSI Pharmaceuticals and Genentech. Pfizer and its counterparts are however seeking an injunction, which will curb further marketing of the drug by Roxane.
Recommended for Buying
Pfizer is a hidden gem. It will not take long before a majority of investors get their hands in on a rally in the coming months. Now is the best time to buy this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.