Pfizer Remains One Of The Healthcare Industry's Most Stable Picks

Oct.30.12 | About: Pfizer Inc. (PFE)

With the continuation of this current recession, investors have been rethinking their portfolios and investing in companies that remain, in the midst of the financial downturn, relatively stable and profitable. Although Pfizer (PFE) - the multinational pharmaceutical corporation based in New York City and currently the world's largest research-based pharmaceutical company - has experienced some blows this past year (in particular, the loss of Lipitor's patent protection), it still remains firmly recession-proof. For the 41st consecutive year, the pharmaceutical has raised its dividend, with an increased yield of about 4.6 percent. In the past decade, Pfizer has expanded through mergers, including those with Warner-Lambert (2000), Phamarcia Biotech (2003) and Wyeth (2009).

The company, co-started by cousins Charles Pfizer and Charles Erhart, was founded in 1849 as a manufacturer of fine chemicals. Nearly a century later, the company discovered oxytetracycline, an important antibiotic that produces essential proteins that help breakdown bacteria buildup. By 1950, Pfizer became a research-based company, becoming one of the largest and most lucrative pharmaceutical companies in the world.

The strength of a pharmaceutical company depends heavily on its pipeline. We know this - and investors often make their calls based on what clues are given publicly about a pharmaceutical company's pipeline. Still, on average, it takes about ten to 15 years for products to make it out of the pipeline, with the Food and Drug Administration (FDA) keeping strict guidelines in order to protect consumers from dangerous side affects of drugs. This obviously can create a more tumultuous industry, and healthcare companies have for a long time been able to provide strong dividends and yields to investors. Few have been more consistently strong and beneficial as Pfizer in this realm, and this trend will continue on.

In the past several years, Pfizer has certainly had its share of pipeline disappointments. Without an immediate successor to Lipitor, the best-selling drug in medical history, Pfizer has experienced substantial profit losses. For example, last quarter, the company stated that profits declined by a jaw-dropping 19 percent from the previous year. With the upcoming release of its third quarter financial results this week, analysts are looking for earnings per share to be around $0.53 (last year during this time it was $0.62), with a total of $14.6 billion in revenue (compared to $17.2 billion during last year's third quarter). This amounts to a year-to-year decline of about 15 percent. The company is also getting smaller: in the summer of 2012, it announced that it was selling its nutrition business to Nestlé for about $11.9 billion dollars, which will help the Swiss food giant gain more substantial access to emerging markets, such as the one in China. In 2011, with the hiring of Ian C. Read, the new chief executive, research was cut by as much as 30 percent, with spending decreasing by $2.9 billion. Pfizer also closed down its English labs, including the one that invented Viagra.

One would think that, with such severe changes, Pfizer would not have the ability to keep investors happy. However, and seemingly to the contrary, the downsizing was not perceived to be reckless or as a forebear to financial doom: company stock actually soared over 5 percent, helping to increase the overall Dow Jones industrial average by 1.25 percent. This past year, the stock is up by 17 percent, with a strong 3.5 percent dividend yield at the current stock price. Pfizer's main loss, then, is strictly due to the loss of Lipitor's protection patent (with sales expected to decrease by about 50 percent, from $9.5 to about $4.5 billion, which means about 20 percent of PFE's total revenues will be affected). Rather than criticizing these necessary downsizing moves, financial analysts and investors have praised Pfizer, reiterating Read's hope that the changes will help re-focus Pfizer's priorities and strengthen a more narrow set of products in the pipeline. Pfizer has had to make difficult choices in the past few years, but they all seem to be the right ones, with their long-term debt decreasing by $8 billion.

Over the next four years, analysts predict that Pfizer will experience an increase in earnings of about 20 percent, with the key to the company's growth locked in with its capital allocation. This beckons back to my point about not banking all hope in the pipeline; Pfizer has remained a pharmaceutical company capable of avoiding the inherent risks of waiting on its R & D breakthroughs, waiting for FDA approval and waiting to see how generics might affect market share of its best-selling drugs.

Currently, Pfizer is selling at over $25 per share; in the past 52 weeks, shares have averaged between a low of $18.15 to a high of $26.09. Its dividend yield is at 0.22/3.46, with an EPS of 1.15. Although the pharmaceutical has had its roll of punches in the past two years, it has managed its budget cuts on research intelligently. Pfizer may still be trading at about half of its peak price experienced in April 1999, but unanimously, analysts claim that it is a far better value today than at the height of its glory. Why? Well for one, it's not subject to the tumultuous drops (as we saw), but rather keeps its price sturdy, its dividend yield decent and its pipeline well-funded and promising.

So we begin to see a picture of capital managed well and a sturdy company. But there's still Pfizer's pipeline - which is among the more promising in the industry. What's next, then, in its pipeline? The biggest news is the marketing of an HIV integrase inhibitor, which was purchased in full by ViiV Healthcare, a global specialist HIV company co-owned by Pfizer and GlaxoSmithKline (NYSE:GSK). As with all things in this industry, success here could mean big things - but investors will be pleased with Pfizer's consistency either way, so the expectation does not have to be for a sales boom, but rather for a solid stream of dividend reward and stable share price.

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

Business relationship disclosure: This article was prepared for Freedonia Freelance by one of our analysts.