Pfizer: An Inexpensive Stock For Long-Term Investors

| About: Pfizer Inc. (PFE)

By Renee O'Farrell

On April 23, Nestlé SA (OTCPK:NSRGF) announced that it had agreed to pay Pfizer (NYSE:PFE) $11.85 billion to acquire its infant nutrition business. According to the Wall Street Journal, the deal:

is expected to help the Swiss food giant expand in emerging markets and cement its leading position in the global baby-formula market.

The acquisition is still subject to regulatory approval.

The acquired business is expected to have $2.4 billion in sales this year - over 85% stem from emerging markets. So, what does selling this unit mean for Pfizer?

The division was amongst the Pfizer's smallest - its 2011 revenue was $67.4 billion - and it is not related to the company's core prescription drugs business. According to the Wall Street Journal. it is only the latest:

Pfizer has been shedding businesses outside its core medicine franchise in part to boost its shares. Last August, it sold its Capsugel unit, which makes drugs in capsule form, to private-equity firm KKR & Co. (NYSE:KKR) for $2.4 billion.

Some investors are calling for the sale of even more units, such as its over-the-counter business, which holds the Advil brand, as well as many other consumer health products.

Pfizer recently traded at just over $22 a share. Analysts are expecting the company's earnings to fall a little this year. They forecast that Pfizer will bring in $2.27 a share this year compared to $2.31 a share last year. Analysts say the company's earnings will go up after that, estimating earnings of $2.35 for 2013, making for a forward P/E of roughly 9.51, versus an average of 17.00 for its peers. It also has strong hedge fund interest, with top hedge funds like Fisher Asset Management, Adage Capital Management and Diamond Hill Capital holding large stakes in the company.

So far this year, Pfizer's stock is up almost 4% versus gains of 8.67% for the market, but that figure could slip even further below the market in coming months. In November 2011, the company lost its ability to sell the popular cholesterol drug Lipitor exclusively. Some of the decline will be offset by growth in emerging markets, cost restructuring and solid gains in its Enbrel, Lyrica and Prevnar lines, but sales of Lipitor reached $9.6 billion in 2011. This will be a hard loss to make up, even with the extra income from the sale of the infant nutrition business. Pfizer has done well so far, but will its efforts hold out?

Pfizer pays an 88 cents dividend (3.90%) which will offset some of that risk, but gains in the short-term are going to minimal, if not marginal. The company has a payout ratio of 63%. This fact combined with the expected loss from Lipitor sales and its infant nutrition business make a further dividend increase unlikely. To its credit, the company is in the process of executing a massive share repurchase program; it bought back $9 billion in shares in 2011 and is expected to repurchase an additional $5 billion in shares this year.

Pfizer is a good company, and I can see the potential for a bright future. It has a strong strategy, and I think this will provide the company the ability to emerge strong, if not better than before.

Looking at rival Johnson & Johnson (NYSE:JNJ), the strength of Pfizer is clear. Johnson & Johnson is facing the after effects of patent expiration on its bacterial infection treatment Levaquin and a manufacturing suspension for cancer treatment drug Doxil. On April 19, the company announced approval for its $21 billion acquisition of medical equipment maker Synthes - Johnson & Johnson's largest takeover ever.

The acquisition could mean great things for Johnson & Johnson, but right now, it is trading at $63.50 and has a consensus EPS estimate of $5.13 this year, up from $5 a share last year. Things are expected to improve next year. Analysts are expecting Johnson & Johnson's EPS to swell to $5.44 a share in 2013. This makes its forward EPS roughly 11.67, which is fairly higher than that of Pfizer. Johnson & Johnson pays a $2.28 dividend (3.60% yield) on a 62% payout ratio. More impressively, the company has increased its dividend every year for over two decades.

Competitor Merck (NYSE:MRK) is facing a number of lawsuits right now - over 2,300 to be exact. The charges stem from allegations that its drug Fosamax causes jaw problems. The company is also facing issues relating to the illegal marketing of the drug Vioxx. It recently traded at $38.40 a share. Last year, the Merck's EPS came in at $3.77 versus consensus estimates of $3.76 a share. Analysts are predicting the company's EPS to reach $3.80 this year, falling to $3.70 a share in 2013, putting its forward P/E at 10.38. Merck pays a high dividend of $1.68 (4.30% yield), and has a long trend of increasing its dividends, but its payout ratio is high at almost 75%. Overall, these factors could be problematic for the company in the future and I don't think the risk is worth the reward.

Rival Bristol-Myers Squibb (NYSE:BMY) does not have a very good outlook right now. The company, which is trading at roughly $34 a share fell short of earnings estimates last year, coming in at $2.28 a share versus expectations of $2.30. Analysts expect Bristol-Myers will earn $1.97 a share this year, falling to $1.94 a share next year. This puts the company's forward P/E at 17.53. Bristol-Myers pays a high $1.36 dividend (4.00% yield) on a payout ratio of 68.50%, but with its upcoming patent expirations on popular drugs such as Plavix and Abilify and high price, I don't think the company is more than a hold.

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

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