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Nathan Parsh
Nathan Parsh
Articles (13) 

Pfizer Offers a Strong Combination of Growth and Income

The stock is trading with an extremely low valuation that doesn't seem to take growth prospects into account. It also yields almost 4%

January 10, 2020 | About:

Some stocks, like Amazon (NASDAQ:AMZN) or Visa (NYSE:V), are owned for growth purposes. These names usually pay little to no dividend, but do offer the chance for substantial capital gains.

Other names like AT&T (NYSE:T) or Verizon (NYSE:VZ) are owned by investors mostly for income purposes. These types of stocks pay high dividends, but often offer slower growth.

Still, there are some stocks that should be attractive to investors looking for both income and growth.

Pfizer Inc. (NYSE:PFE), one of the largest health care companies in the world, is a good example of a company offering both growth and a high yield.

Recent earnings report – mixed results, but key products showing growth

Pfizer reported third-quarter earnings results on Oct. 29.

Revenue was lower by 4.7% to $12.7 billion, but was $315 million higher than analysts had predicted. Currency exchange was a headwind during the quarter, reducing revenues by 2%. Adjusted diluted earnings per share totaled 75 cents for the quarter, 13 cents above estimates, but a decline of 2 cents from the previous year.

Biopharma, which includes the Innovate Health and Hospital Businesses, grew 7%. Eliquis, which prevents blood clots from forming after surgery, continues to perform well for the company, showing 18% year-over-year growth due to higher adoption rates.

Oncology sales were up 28% as product sales for this business were up almost across the board. Growth was led by a 25% improvement in Ibrance sales due to increased penetration. Xtandi, which treats prostate cancer, had sales growth of 25%. Pfizer paid $14 billion in in 2016 to acquire Medivation in order to add Xtandi to its product lineup.

Rare Disease revenues were higher by 13% (up 16% in constant currency), mostly due to improvements in Yyndaqel. The drug helps prevent heart failure and was recently launched in May. Vaccines were down 2%, primarily due to a 3% decline Prevnar 13 sales.

Pfizer expected adjusted diluted earnings per share in a range of $2.94 to $3 for the year, up from a range of $2.76 to $2.86 previously.

Top and bottom-line results were down slightly from the previous year, but many of Pfizer’s most important products saw growth during the quarter.

Its not just quarterly results that has me bullish on Pfizer. The company is focusing on its core businesses.

Mergers, joint ventures and acquisitions

It was announced on July 29 that the Upjohn segment, which houses Pfizer’s off-patent branded and generic medicines, will merge with Mylan (MYL) to form a new company.

The Upjohn segment declined 28% year over year. Its epilepsy and nerve pain drug Lyrica was a primary contributor to this decline, with sales plummeting 57% in the most recent quarter. This product faces significant generic competition, which is eroding sales results. Off-patent brands within this new company will include Lipitor and Viagra. The deal is expected to close sometime in the middle of 2020. Revenue for the combined company is expected to reach $20 billion, while producing $4 billion in free cash flow. Pfizer shareholders will own 57% of the new company.

The Consumer business had a sales decline of 27% last quarter, but this was due to Pfizer and GlaxoSmithKline (GSK) agreeing to combine their respective consumer health care segments into a joint venture. Under terms of the agreement, Pfizer will have a 32% equity stake in the joint venture. The joint venture was completed on Aug. 1.

Pfizer’s Consumer and Upjohn segments both produced lower sales last quarter, but both businesses have either been divested or are in the process of being divested. This will allow the company to focus on its higher-growth biopharma business.

Pfizer has never been afraid to add products to its portfolio through acquisitions. For example, the company completed its $10.6 billion purchase of Array BioPharma on July 3. This acquisition will enhance the company’s oncology lineup, especially in the area of skin cancer.

By divesting its Upjohn and consumer businesses and adding strategic acquisitions, Pfizer is focusing on its higher-growth pharmaceuticals.

This focus on pharmaceuticals is likely to be a catalyst for growth, especially given how much Pfizer spends on research and development.

Future growth – lots to be excited about

Pfizer's quarterly results were slightly lower than the same quarter a year ago, but there are several reasons why investors should be optimistic about the company’s future.

Pfizer has a stated goal of launching 15 treatments that produce at least $1 billion in annual sales over the next five years. To achieve this, the company would need a healthy research and development budget in order to produce a robust pipeline of products. Fortunately, the company has invested heavily in R&D over the years.

Listed below are the company's research and development spending:

  • 2013: $6.7 billion (12.9% of revenues)
  • 2014: $8.4 billion (16.9% of revenues)
  • 2015: $7.7 billion (15.7% of revenues)
  • 2016: $7.9 billion (14.9% of revenues)
  • 2017: $7.7 billion (14.6% of revenues)
  • 2018: $8.0 billion (14.9% of revenues)
  • 2019: $5.8 billion through the third quarter (14.9% of revenues)

Through the end of the most recent quarter, Pfizer has spent more than $52 billion on research and development over the last seven years. This type of investment, along with acquisitions, has given way to an extensive pipeline of products.

Pfizer has a total of 96 products in various phases. Included in this count are 12 oncology products in phase 3 trials and 15 total products in the lucrative rare disease category. While it is unlikely that all of these products will become blockbusters for Pfizer, the company’s pipeline is diversified enough to be well positioned for future growth.

On top of that, several of the company’s products that are already on the market are expected to reach peak sales that are well above current levels. Listed below are a few examples of products with a high ceiling for growth.

  • Eliquis has taken market share from competing products as data has shown that the product is more effective against preventing strokes or death. Peak sales are now expected to be $12 billion by 2024.
  • Ibrance could see peak sales as high as $8 billion. Breast cancer is the most common type of cancer among women, and this product had strong growth rates in both the U.S. and international markets.
  • Xtandi has received a priority review designation from the Food and Drug Administration to treat metastatic hormone-sensitive prostate cancer. If approved, this would be an additional indication for Xtandi. Peak sales for this product could reach almost $5 billion.
  • Vyndaqel was just approved in May of 2019 and only 1,300 patients had received the medication as of the end of August. Still, the drug brought in $156 million in sales for the quarter. This product could see $2 billion in peak sales.

Pfizer has a wide collection of products that are expected to see peak sales in the billions. While some of these products already produce billions in revenue per quarter, others have only recently been approved for treatment. This, combined with a large product pipeline, gives the company multiple ways to grow in the future.

Despite this growth potential, shares have a very reasonable valuation. Using the midpoint for updated guidance and the most recent closing price of $39, shares trade with a price-earnings ratio of 13.1. According to Value Line, if this was the average for the year, this would be the lowest average price-earnings ratio since 2009. For context, the S&P 500 has an average price-earnings ratio of more than 24 at the moment.

The current price-earnings ratio appears to undervalue Pfizer’s growth potential. For context, the company has an average multiple of 20 for the last decade. Therefore, a ratio of 15 appears to more accurately reflect product sales for the next few years. Using updated guidance for the year gives a price target of $45 for the stock. Reaching this level would result in a 15% increase in share price. And that’s before you factor in the company’s dividend.

Dividend growth – high free cash flow payout ratio, but an above-average yield

Pfizer has increased its dividend for the past 10 years. This follows a dividend cut in both 2009 and 2010 as the company was digesting its $68 billion purchase of Wyeth. A dividend cut is never good, but the company did so in order to help it grow. Wyeth brought several products to Pfizer, including Prevnar, that are still sources of revenue today. Prior to this dividend cut, the company had increased its dividend 41 consecutive years, per U.S. Dividend Champions.

Pfizer most recently raised its dividend 5.6% for the upcoming March 6 payment, which is below the five-year average increase of 7.2%.

Given the company’s previous dividend cuts, investors should be reassured that Pfizer’s dividend appears safe today. The company paid out $1.44 in dividends per share in 2019. Based off estimates for earnings per share for the year, the payout ratio is 48%. This is well off the 10-year average of 76%. Using earnings, the dividend appears safe and likely to continue to grow for years to come.

Free cash flow is often a preferred method of assessing dividend safety. Through the end of the third quarter, Pfizer has distributed $6.1 billion in dividends while generating $7.3 billion in free cash flow for a payout ratio of 84%. This payout ratio is high and helps explain why the last increase was lower than normal. While I don’t see another dividend cut coming, future dividend growth will likely be restricted if free cash flow doesn’t improve.

Pfizer offers a forward dividend yield of 3.9%. This is double the average dividend yield of the S&P 500. For context, Pfizer has a five- and 10-year average dividend yield of 3.4% and 3.6%. This means shares are trading with a yield that is above the stock’s historical average.

Final thoughts

Pfizer’s most recent earnings results saw top and bottom lines decline from the third quarter of the previous year. However, the company’s top-selling products did very well during the quarter. It also has several newer products that are expected to ramp up sales over the next few years.

The company is shedding itself of its lower-performing businesses in order to focus more on its higher-growth pharmaceutical products. Pfizer also has numerous other products in late-stage development that should only work to improve the company’s fundamentals.

At the same time, shares of Pfizer appear undervalued and not reflective of the positive performance of products already generating sales and those in the pipeline. The stock also offers a yield of nearly 4% and has increased its dividend in 51 of the last 53 years.

For these reasons, Pfizer is a strong buy for investors looking for a strong combination of growth and income.

Disclosure: I am long Pfizer, Visa, AT&T and Verizon.

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About the author:

Nathan Parsh
I was originally born in Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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