With the markets on a rollercoaster so far in 2022, I find it best to circle back to names that are very profitable. Profitability matters even as markets fall as investors will focus on those names that are outperforming the rest.
This article will examine two companies that score very well on GuruFocus’ profitability rank. Each name also offers a dividend yield that is more than twice the average yield of 1.35% for the S&P 500 Index and trades below fair value according to the GF Value chart.
Pfizer
The first name for consideration is Pfizer Inc. (PFE, Financial) a leading pharmaceutical company. Following the combining of its consumer health care company with GlaxoSmithKline plc (GSK, Financial) in 2019 and its spinoff of its off-patent branded and generic drugs in 2020, Pfizer is now almost entirely focused on its higher margin pharmaceutical and vaccine businesses. The company has a market capitalization of close to $307 billion and generates annual sales greater than $81 billion.
For its profitability rank, Pfizer receives an 8 out of 10 from GuruFocus.
Pfizer’s best score is on return on capital, which tops close to 97% of 1,092 companies in the drug manufactures industry. This is also at the very top of the 10-year median score for the company. Other top areas include return on equity and three-year earnings per share without non-recurring items growth, both of which Pfizer is in the top 5% of its peer group and close to a 10-year high.
The company tops at least 88% of its industry peers in every category that GuruFocus tracks. Pfizer scores very well on an historical basis as well, except for operating and net margins. That said, the current figures for these two metrics are at the median point of the last 10 years. With all other categories being close to the best for the last decade, these two areas still look solid.
Pfizer has raised its dividend for the last 13 years. The dividend has a compound annual growth rate of 6.6% over the last decade. The company most recently raised its dividend by 2.6% for the dividend payment made March 4.
Shares of Pfizer yield 3% as of the most recent close, which is lower than the 10-year average yield of 3.6%. This is still more than twice the average yield of the S&P 500.
The stock looks attractively priced according to the GuruFocus Value chart:
With a current share price of $54.19 and a GF Value of $77.40, Pfizer has a price-to-GF-Value ratio of 0.70. Reaching the GF Value would mean a 43% return in the share price before even adding in the dividend yield. Shares are rated as significantly undervalued by GuruFocus.
T. Rowe Price
The second stock to consider is T. Rowe Price Group Inc. (TROW, Financial), one of the largest asset managers in the public market. The company provides clients with a host of financial products, including no-load mutual funds, private accounts and sponsored investment products. The company has a market capitalization of $33.5 billion, annual revenue of $7.7 billion and assets under management of $1.7 trillion.
T. Rowe Price scores a perfect 10 out of 10 rank on profitability from GuruFocus.
T. Rowe Price's best score is on return on equity, which is above more than 89% of the 1,669 companies in the asset management industry. The company also scores a high rate of return on assets, which tops more than 85% of peers. Both rates are the highest in the last decade for the company.
Return on capital is a little weaker, but still in the top third of asset managers in the market place. The operating margin of more than 48% is in the top 30% of T. Rowe Price’s industry. Both marks are also the company’s top score in the last 10 years.
T. Rowe Price does have a few areas where it doesn’t rank as well against the competition. Though it is the company’s best performance in the last decade, the net margin is worse than almost three-quarters of the industry. Three-year revenue growth and three-year earnings per share without non-recurring items growth is right in the middle of the peer group.
T. Rowe Price has raised its dividend for 36 consecutive years, qualifying the company as a Dividend Aristocrat. The company has aggressively grown its dividend over the years, with the last decade seeing an annual increase of close to 14%. T. Rowe Price raised its dividend 11.1% for the upcoming March 30 payment date.
The stock yields 3.3% today, which compares very favorably to the 10-year average yield of 2.5%.
T. Rowe Price also looks to be undervalued against its GuruFocus Value chart:
The stock closed the Monday trading session at $145.67. With a GF Value of $185.08, T. Rowe Price has an implied price-to-GF-Value ratio of 0.79. Reaching the GF Value would mean a 27% return from the current price.
Final thoughts
Pfizer and T. Rowe Price are two examples of companies with very strong profitability ranks. Pfizer ranks among the best in its industry on almost every metric. The company also scores well against its own historical performance. T. Rowe Price has an overall higher ranking, but does have some middling results against its peer group. Compared to its own history, however, the company’s most recent results are the best seen in a decade in a number of areas.
Each of these stocks also offers a 3%+ dividend yield and trades at a steep discount to GF Value. For investors looking for highly profitability companies with generous yields and value characteristics, I believe both Pfizer and T. Rowe Price could be attractive opportunities to consider.
