Why Pfizer's 4% Yield Is Your Best Covid-19 Vaccine Play

Aug. 13, 2020 12:24 PM ETPfizer Inc. (PFE)ARCT, AZN, AZNCF, BNTX, DVAX, INO, JNJ, MRK, MRNA, VTRS, NVAX83 Comments

Summary

  • I demonstrate why Pfizer is the best choice for dividend investors playing the Covid-19 vaccine theme.
  • The worries about a dividend decrease from the Upjohn spinoff are overblown.
  • What will be left will be a lean, high growth, biopharmaceutical company.

Written by Robert Kovacs

Introduction

Back in May, I wrote an article in which I suggested that “with or without a Covid-19 vaccine”, Pfizer (NYSE:PFE) was a buy.

Since then the stock has dropped 15% and climbed back to the price it was a quarter ago. Pfizer is currently trading at $37.79 and yields 4.02%.

Source: Open Domain

Quite a lot can happen in 3 months. And quite a lot has happened. For one, Mylan (MYL) shareholders overwhelmingly approved the Upjohn-Mylan merger which is expected to close by the end of the year.

On the Covid-19 vaccine front –where Pfizer collaborates with BioNTech (BNTX), the vaccine which has entered phase 3 clinical trials is showing promise. A lot is expected from vaccine frontrunners such as Pfizer, Moderna (MRNA) & AstraZeneca (AZN).

Back in May, I believed making bets on Covid-19 programs was too early. Yet as time has passed, it has come obvious to me that not only Pfizer is a great pick with or without the vaccine, it is a frontrunner, and as likely as any of the other top candidates to have a winner. While we aren’t out of the woods yet, more positive news keeps coming. The least I can say is that I am cautiously optimistic about the whole thing.

Our MAD Scores give PFE a Dividend Strength score of 89 and a Stock Strength score of 69.

Source: mad-dividends.com

Before going through Pfizer’s dividend strength profile (during which I’ll review the Upjohn spinoff) and stock strength profile, I’ll go through the main Covid-19 vaccine candidates to show why Pfizer is the safest bet.

The Covid-19 Vaccine race

It should be noted that I’m not a doctor and my knowledge of all things medical, is limited. Take it all with a grain of salt, this is but a layman’s take on it.

Prior to this year, I had a rudimentary understanding of Phase 1/2/3 clinical trials, from having followed development of pharmaceutical stocks in the past. This year the global pandemic ravaged the economy, and our ability to travel and move. It is not a surprise that many of us have skilled up and learned more; if only enough to answer the big question: When will everything go back to normal?

Once a month or so, I’ll check in with the New York TimesCoronavirus Tracker”, which provides a nice update on vaccine candidates.

Of course I’m interested as a global citizen, but I’m also interested as a dividend investor.

In the universe of US stocks, one can drill down the candidates to a small list. The explanations of the different phases all come from the New York Times webpage.

(Note: if a vaccine is undergoing a combined phase trial, –such as Phase 1/2– I will consider it in Phase 2.)

Phase 1: “Scientists give the vaccine to a small number of people to test safety and dosage as well as to confirm that it stimulates the immune system.”

  • Inovio (INO). It doesn’t pay a dividend.
  • Merck (MRK). It yields 3% and has been growing the dividend consistently for nearly a decade.
  • Dynavax (DVAX). It doesn’t pay a dividend.

Phase 2: "Scientists give the vaccine to hundreds of people split into groups, such as children and the elderly, to see if the vaccine acts differently in them. These trials further test the vaccine’s safety and ability to stimulate the immune system.”

  • Arcturus Therapeutics (ARCT). It doesn’t pay a dividend.
  • Johnson & Johnson (JNJ). It yields 2.75% and has been growing the dividend for decades.
  • Novavax (NVAX). It doesn’t pay a dividend.

Phase 3: “Scientists give the vaccine to thousands of people and wait to see how many become infected, compared with volunteers who received a placebo. These trials can determine if the vaccine protects against the coronavirus.”

  • Pfizer: yields 4% and has been growing the dividend for decades.
  • Moderna. It doesn’t pay a dividend.
  • AstraZeneca. It yields 3% although the dividend hasn’t increased in the past 3 years.

For dividend investors like me, who are seeking to live off of dividends in retirement, the list of viable candidates is quickly reduced to 4 stocks:

  • Merck
  • Johnson & Johnson
  • Pfizer
  • AstraZeneca

Because of AstraZeneca’s lack of dividend growth in the past 3 years, we will also remove it from the list.

This leaves one with MRK, JNJ & PFE. All 3 good stocks in their own right. I own PFE and JNJ. Sam & I will be taking a deeper look at MRK in the next weeks as we haven’t analyzed it recently.

But as far as the Covid-19 race is concerned, it goes without saying that PFE is the frontrunner. If things go well for them, Pfizer could have an approved vaccine for emergency use by October, at a time when JNJ could at best be moving into a Phase 3 trial, and when Merck might not even be out of its Phase 1.

By pure deduction then, for dividend investors, Pfizer seems to be the best bet. This doesn’t mean that Pfizer’s vaccine will most definitely work, or that JNJ or MRK won’t have a superior vaccine and sell loads at some point. But as it stands, PFE is ahead.

Now that this has been established, let’s move on to more tangible analysis, considering why Pfizer is a good stock for dividend investors as is.

Dividend Strength

All my analysis of equities starts the same way: with the concept of dividend strength. Dividend strength is the cornerstone of our strategy. It is defined by the simultaneous existence of dividend safety and dividend potential. The former can be understood as a company’s ability to pay the dividend through thick and thin, while the latter is the combination of dividend yield & potential dividend growth offered by a stock. In short, we’re looking for stocks with safe dividends, which will produce solid levels of income.

The philosophy is clearly laid out in our article “How you can retire on dividends forever and ever”.

Dividend Safety

Pfizer Inc. has an earnings payout ratio of 60%. This makes PFE's payout ratio lower than 38% of US paying dividend stocks.

PFE pays 56% of its operating cashflow as a dividend, which is lower than 19% of dividend stocks.

PFE pays 66% of its free cashflow as a dividend, which is better than 27% of dividend stocks.

03/07/2016

02/07/2017

01/07/2018

30/06/2019

28/06/2020

Dividends

$1.1600

$1.2400

$1.3200

$1.4000

$1.4800

Net Income

$1.13

$1.37

$3.74

$2.20

$2.52

Payout Ratio

103%

91%

36%

64%

59%

Cash From Operations

$2.43

$2.56

$2.93

$2.52

$2.66

Payout Ratio

48%

49%

45%

56%

56%

Free Cash Flow

$2.17

$2.25

$2.60

$2.13

$2.27

Payout Ratio

54%

55%

51%

66%

65%

Source: mad-dividends.com

Pfizer’s payout ratios are not low by any means. They take up a sizeable amount of the firms free cashflow. Nonetheless, there is a serious buffer before the dividend would be at risk. The payout ratios have edged higher over the past 5 years as cashflows have been mostly flat, while the dividend has continued to increase.

This isn’t yet a threat to dividend stability, but it might soon threaten the company’s ability to grow the dividend at an attractive rate. This will be considered in the next section.

Pfizer is a cash generating machine, which, while a mature company, has such a position in its industry that it can continue to generate large amounts of cash throughout all environments.

The dividend is safe.

But wait! What about the Upjohn spinoff? Isn’t the dividend supposed to decline because of it?

Yes that is true. Let’s do some back of the napkin calculations here.

Each share of Pfizer will get you 0.12 shares of the new Mylan-Upjohn company (which will be called Viatris). Given that there are 5.619bn shares of Pfizer, and that Pfizer shareholders will own 57% of Viatris, we can conclude that there will be about 1.183bn shares of Viatris.

Viatris is expected to generate $4bn of free-cashflow per year, and pay 25% of it as a dividend. If we flatten this out to $1bn in FCF per quarter, and $250mn in dividends, we could expect a quarterly dividend of $0.21 per share.

Now, Pfizer expects that the dollar amount shareholders will receive from their 1 share of Pfizer and 0.12 shares of Viatris will be the same amount they are currently receiving from Pfizer.

This would suggest a new dividend of:

$0.38 – 0.12*0.21 = $0.355.

Or a modest 6-7% drop is to be expected. Let’s look at how this impacts dividend potential.

Dividend Potential

Pfizer Inc. has a dividend yield of 4.02% which is higher than 70% of US dividend paying stocks. If my back of the napkin calculations are correct, post spinoff and post dividend cut, the yield on the current price would be about 3.7%. Of course, if the dividend drop is bigger than I anticipate, the post spinoff yield could be lower. But even if the Viatris dividend is twice as high as I anticipate, the offsetting Pfizer drop would push the yield down to 3.5%.

Source: mad-dividends.com

The dividend grew 6% during the last 12 months which is in line than the company's 5 year average dividend growth of 6%.

Source: mad-dividends.com

For stocks which yield between 3.5% and 4%, this is in the sweet spot of dividend growth.

The good news, is that as Pfizer remove Upjohn from the mix, it will be able to focus on a strong, fast growing, biopharmaceutical company.

This faster growing company could retransform Pfizer into a higher growing dividend stock, or at the very least allow the company to pursue its 6% annual growth rate for many years to come.

To get a feeling of the drag Upjohn has been turn to slide 12 of the latest earnings presentation.

Source: Q2 earnings presentation

The Upjohn numbers were of course cut by the loss of exclusivity –LOE– of their Lyrica drug in the US. But even excluding this, the segments revenues were down 6% while Biopharma revenue was up 6%, with strong operational results across the different brands, as you can see on slide 5 of the earnings presentation.

Source: Earnings presentation

Therefore, I believe that if anything, the Upjohn spinoff increases the stocks potential. If you don’t want to own the spinoff, nothing will stop you from selling the stock, and repurchasing Pfizer.

Dividend Summary

PFE has a dividend strength score of 89 / 100. The company is a cash generating machine. It offers a combination of dividend yield and dividend growth potential which is unmatched among its peers. As far as all weather healthcare stocks go, Pfizer remains my favorite dividend pick.

Stock Strength

But if the stock is still a good buy for dividend investors, how is it likely to perform. What will drive the price up or down from current levels, and what should investors expect going forward? To answer this question, I’ll look at the stock’s 3 key factors: value, momentum and quality, before drawing conclusions. The combination of these 3 factors, results in what we call a Stock Strength score, or the likelihood that a stock will beat the market in upcoming quarters.

Value

  • PFE has a P/E of 15.00x
  • P/S of 4.32x
  • P/CFO of 14.19x
  • Dividend yield of 4.02%
  • Buyback yield of 0.93%
  • Shareholder yield of 5.05%

According to these values, PFE is more undervalued than 73% of stocks, which is encouraging.

The stock trades at a reasonable multiple of both earnings and cashflows.

Source: mad-dividends.com

Relative to its own history, Pfizer is trading below its 10 year median P/E.

As I look at this, it feels like Pfizer is valued, as if the spinoff has already happened. Given that the spinoff will give an extra $2 to $4 to shareholders in the form of Viatris shares, Pfizer seems at least 10% undervalued at current prices.

Value Score: 73 / 100

Momentum

Pfizer Inc. trades at $37.79 and is down -0.81% these last 3 months, -0.79% these last 6 months & yet is still up 3.96% these last 12 months. This gives it better momentum than 46% of stocks, which is to say, the stock lacks momentum.

While its 12 month performance is still greater than 62% of US stocks, a testament to its resilience, its 3 month performance is among the 20% worst stocks.

While most stocks have rallied in the past 3 months, Pfizer has remained flat. This is because the $38 mark has been a point of resistance for the past year.

Source: mad-dividends.com

Since the beginning of the year, Pfizer has tested this level 3 times, without successfully breaking above. Even the breakout which occurred in late December was short lived.

Source: mad-dividends.com

But from a technical side, this might be changing. Compare the last time Pfizer challenged the $38 mark. It was just below its 200 day SMA, and unable to breach it.

This time around it looks different. Pfizer’s price is above its 200 day SMA, its 20 day SMA has just crossed the 50 day SMA.

If the price can bounce back off the 200 day SMA and stay above it, we might get another chance at challenging the $40 level.

Good covid-19 vaccine news could drive the way on sentiment alone.

However failure to remain above and challenge higher levels could see the stock be stuck between $35 and $38 for a while.

The next few weeks will be key in determining whether or not Pfizer will close its valuation gap or not.

Momentum score: 46 / 100

Quality

PFE has a gearing ratio of 1.8, which is better than 45% of stocks. The company’s liabilities have increased by 18% over the course of the last 12 months. Note that this has happened because Upjohn raised the $12bn it needs to pay PFE at the time of the spinoff.

The company’s operating cashflow can cover 13.2% of liabilities. Each dollar of assets generates $0.3 in revenue, which is better than 33% of stocks, but this results in superior return on equity, of 22%; better than 86% of stocks. It depreciates 248.1% of it’s capital expenditure each year, which is better than 77% of stocks. PFE has a Total Accruals to Assets ratio of -13.2%, which is better than 62% of companies. This suggests PFE’s quality is better than 62% of stocks. Pfizer is a well-rounded, well managed, large cap stock. No red flags appear here, Pfizer is of good quality.

Quality Score: 62 / 100

Stock Strength Summary

When combining the different factors of the stocks profile, we get a stock strength score of 69 / 100 which is encouraging. Pfizer is a high quality company. There seems to be a slight valuation gap of 10-15%, and a potential technical setup to close that gap in upcoming weeks. Sentiment could push the stock higher. If value isn’t realized now, it will be when Upjohn spins off.

Conclusion

With a dividend strength score of 89 & a stock strength of 69, Pfizer is a great stock for dividend investors. In a time where healthcare stocks involved with the Covid-19 pandemic have done very well, Pfizer has gone nowhere. The opportunity for dividend investors exists.

I am happy with the sizing of Pfizer in my portfolio, but if you haven’t yet purchased the stock, or have a small position, it is a great buy now.

We will be increasing the size of our Pfizer position in the All Weather Dividends model portfolio at the end of the month.

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This article was written by

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Disclosure: I am/we are long PFE JNJ. 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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