Pfizer (PFE) is a research-based biopharmaceutical company. It discovers, develops, and manufactures medicines and vaccines, and it is a producer of pharmaceuticals and biotech drugs that are sold and distributed globally.
Pfizer’s products include oncology and immunology drugs, treatments for rare diseases, and vaccines. The company has been in the news for months as the co-developer of one of the major vaccines to protect against the coronavirus.
Pfizer’s Dividend Record
Pfizer’s yield is in the range that I consider high, at 4.4%. I think anything over 4% is high these days.
Its 5-year dividend growth rate (6% per year) is fast for a high-yield stock, but it has been trending down. Note this trend as shown on the CCC (Dividend Champions) document:
Reading from right to left, you can see that Pfizer’s dividend growth rate (DGR) has been steadily decreasing for a decade.
On top of that declining growth trend, 2021 presents an unusual year for Pfizer’s dividend, because last year it spun off its Upjohn unit. In connection with that spinoff, the company announced that it would keep shareholders whole with respect to the total dividend they had formerly been getting from Pfizer. Pfizer shareholders received shares of the new company (Viatris) after the spinoff, and “promised” that the dividend from the new company plus Pfizer’s dividend would be no worse than what shareholders had been receiving from Pfizer before the spinoff.
Viatris just announced its first dividend, to be first paid in the second quarter of 2021. The amount came in lower than expected. Simply Safe Dividends estimates that Pfizer might lower its next quarterly dividend, to reflect the Viatris offset, by about 5%.
Pfizer has not yet announced its second-quarter dividend. In the first quarter, Pfizer made its dividend raise on its normal schedule.
Even with a 5% reduction, Pfizer would still yield 4.4%, which I would still consider high-yield. After that probable adjustment, Simply Safe Dividends expects to keep Pfizer’s dividend safety grade at 75, which is solidly in the “safe” range. As we will see later, Pfizer has plenty of cash flow to pay its dividends.
Because of the moving parts, Pfizer may end up having raised, then lowered, its dividend in consecutive quarters. After that, however, I would expect Pfizer to continue (or restart) its longstanding practice of raising its dividend annually.
(Source: Simply Safe Dividends)
Pfizer’s dividend safety score from Simply Safe Dividends – 75 out of 100 points – has been steady since 2019, and the score was reaffirmed three times in the last four months, most recently on February 17 after the company’s Q4 earnings report.
Overall, I would categorize Pfizer as a high-yield, mid-growth DG stock with a safe dividend – if you are willing to overlook the probable small decrease coming up next quarter (if it happens). Long-term Pfizer shareholders who held onto their Viatris shares will not experience a decrease in total dividends from what they were receiving from Pfizer before the spinoff.
Business Model and Company Quality
It is challenging to think about Pfizer’s long-term business without being consumed by the immediacy of its efforts in developing, producing, and distributing its coronavirus vaccine. The company is scaling manufacturing to be able to deliver two billion doses by the end of 2021. Bringing in $15 billion in 2021, the vaccine immediately becomes the largest product in Pfizer’s portfolio.
But taking a step back, Pfizer’s business profile was well established before coronavirus. As shown in the following slide, the company has several blockbuster products excluding the vaccine (denoted on the slide as “BNT162b2”). All of the products grew in 2020.
(Source: Q4 earnings presentation)
Pfizer benefits from its diverse portfolio of drugs, with at least six brands accounting for more than $1B in annual sales and none dominating overall sales. For context, many brand-drug developers have more sales concentration in their key brands.
Pfizer’s business also benefits from its global nature. Pfizer gets 46% of sales from the USA; 25% from emerging markets; 17% from Europe; and 12% from the rest of the world.
As do all branded-drug companies, Pfizer spends heavily on R&D to discover new drugs and put them into its development pipeline. In recent years, R&D spending has been about $8-9 B annually. Pfizer has nearly 100 compounds in various clinical trial phases, about 25% of which are in phase 3 (final stage of human clinical trials) and/or awaiting final FDA approval.
In 2020, Pfizer completed the spinoff of its Upjohn unit, which was combined with Mylan to create a new company called Viatris (VTRS). With the spinoff, Pfizer lost Lipitor, Lyrica, Celebrex, Viagra, and other legacy products that had lost patent protection.
The coronavirus vaccine was developed with unprecedented speed: just 248 days from collaboration agreement to the submission for Emergency Use Authorization. Many believe that the mRNA technology provides a new model for therapeutic development. Per the CDC:
mRNA vaccines are a new type of vaccine to protect against infectious diseases. To trigger an immune response, many vaccines put a weakened or inactivated germ into our bodies. Not mRNA vaccines. Instead, they teach our cells how to make a protein—or even just a piece of a protein—that triggers an immune response inside our bodies. That immune response, which produces antibodies, is what protects us from getting infected if the real virus enters our bodies.
Some analysts believe that, with the emergence of more Covid-19 variants, there will be an ongoing need for repeat vaccinations, so the coronavirus vaccine may turn out to be more than a short-term business. Of course, nobody really knows yet.
Morgan Stanley, in analyzing Pfizer, has two interesting categories called Disruption and Secular Growth. It rates Pfizer as positive in both categories, which it describes this way:
- Positive disruption: A company has significantly altered, or could potentially alter, the business paradigm across an industry.
- Positive secular growth: A company’s primary long-term earnings drivers operate independently from the macro environment.
Morningstar awards Pfizer a Wide moat, based primarily on:
- Its patents, which confer strong pricing power and give Pfizer time to develop new drugs before older drugs lose patent protections and become vulnerable to generic competition.
- Strong and entrenched brand names.
- Economies of scale.
- Powerful distribution network, not only for its own drugs, but also as an attractive partnership opportunity for smaller drug companies.
Risks for Pfizer include any disruptions resulting from the Upjohn spinoff, as well as the usual pharmaceutical risks involving expirations of patents, the necessity for major R&D spending, and long product development cycles.
A key unknown is the sustainability of the Covid-19 vaccine business. Some analysts see the coronavirus as one-and-done, while others believe the need (and therefore the revenue) will remain at some significant level for several years.
As seen in the table above, Pfizer gets an A++ financial grade from Value Line, which is their highest grade. Let’s look at specific financial categories and see if we agree.
Revenue is where all financials start for a company. Pfizer’s revenue for 2020 is distorted to the downside by the divestment of Upjohn (which it treats as a discontinued operation), while in 2021 it will be distorted to the upside by the “windfall” effect of the coronavirus vaccine. Management projects approximately $15 billion in 2021 revenue from the vaccine, which would make it, temporarily, the company’s largest product.
(Source of all graphics in this section: Simply Safe Dividends)
Return on Equity (ROE) is a standard measure of financial efficiency. ROE is the ratio of profits to shareholders’ equity.
The average ROE for all Dividend Champions, Challengers, and Contenders is about 14%-15%, which is similar to the ROE for S&P 500 companies generally.
Historically, Pfizer’s ROE has run about in the average range for large companies.
Debt-to-Capital (D/C) ratio measures how much a company depends on borrowed money. Companies finance their operations through a mixture of debt, equity (new shares), and their own cash flows.
A typical D/C ratio for a large, healthy company is 50%, meaning equal dependence on debt and equity. Debt is an indicator of financial risk. All else equal, stocks with high D/C ratios are riskier than those with low D/C ratios.
Pfizer’s debt ratio has been growing, from a very low-debt situation in 2014 to an average-debt situation currently. That is not alarming, but modest debt is no longer a clear plus for the company. Pfizer’s S&P credit rating is A+, putting it in a high tier of investment-grade categories.
Operating margin measures profitability: What percentage of revenue is turned into profit after subtracting cost of goods sold and operating expenses?
Per recent research, typical operating margins for S&P 500 companies have been in the 10-11% range. Pfizer’s margins have been more than double that for the past several years.
Earnings per Share (EPS) is the company’s officially reported profits per share. We want to see if a company has years when it officially lost money, or if its earnings are steadily increasing, declining, or flat.
Pfizer has delivered solid positive earnings every year over the past decade. Indeed, with the coronavirus vaccine impact, its earnings are forecast to grow significantly in the next fiscal year.
Longer-range forecasts for Pfizer’s earnings, in my research, were all over the place. I decided not to draw any conclusions from them, because of all the variance.
Free Cash Flow (FCF) is the money left over after a company pays its operating expenses and capital expenditures. Whereas EPS is subject to GAAP accounting rules that require time-shifting money-recording, cash flow is a more direct measure of money flowing through the company on a real-time basis. FCF is the cash that a company has available for dividends, stock buybacks, and debt repayment.
Pfizer generates a lot of free cash. It took a drop in 2020 with the Upjohn divestment, but cash generation is not a problem for this company.
Share Count Trend shows whether the company’s outstanding shares are increasing in number, decreasing, or remaining flat.
I like declining share counts, because the annual dividend pool is spread across fewer shares each year. By retiring its own shares, the company is investing in itself, expanding each remaining share into a larger piece of the pie, and improving all of the per-share statistics.
Pfizer has been reducing its share count steadily over the past decade. Its float has dropped nearly 30% over that time.
Here is a summary of the items above:
I think Value Line has over-graded Pfizer on its financials by giving it the highest grade possible on their scale. As you can see in the table above, several categories are OK or average, and things like revenue and earnings growth are difficult to project, what with the Upjohn divestment working in one direction but the vaccine working in the other. My own grade is a B on a normal A-F scale.
Stock valuation is separate from evaluating a company. In the evaluations above, we graded Pfizer as to its fundamentals: dividends, quality, and financials.
In this section, we see whether its stock is fairly valued to buy or hold. Valuation is a function of what the market thinks of Pfizer’s stock.
I use four models in valuing companies, then average the results. See Dividend Growth Investing Lesson 11: Valuation.
Models 1 and 2: FASTGraphs relative P/Es
These first two models compare the stock’s current price to FASTGraphs’ (1) basic estimate of its fair value, and (2) the stock’s own 5-year average valuation. I use an 8-year display period on the graph, which causes it to display the stock’s 5-year average valuation.
The orange line is Model #1, FASTGraph’s default valuation reference line based on a standard “fair” price-to-earnings ratio of 15. The blue line is Model #2, based on Pfizer’s own average 5-year P/E, which is 13.4.
The black line is Pfizer’s actual price. The right end of the black line (most recent price) represents the stock’s current valuation, which is 14.5. From simple observation, we can see that Pfizer’s price is close to both of the fair-value reference lines.
Let’s put numbers on it by computing valuation ratios, which are the ratios of the actual P/E to the fair-value references. Here is the formula for both models:
Valuation Ratio for FASTGraphs = Actual P/E divided by Reference P/E
Here are the valuation ratios for Pfizer:
- Model 1: Based on default (orange) line: 14.5 / 15 = 0.97
- Model 2: Based on historical (blue) line: 14.5 / 13.4 = 1.08
Both of these results are within 10% of the respective fair-valuation reference lines, and both of them suggest that Pfizer’s stock is fairly valued.
Model 3: Morningstar DCF Valuation. Morningstar uses a discounted cash flow (DCF) model for valuation. The idea behind this model is that a company is worth all the cash flows that you expect the company to generate in its operating life, discounted back to the present to account for the time value of money. That is considered to be the stock’s intrinsic or inherent value based on its fundamentals.
As Warren Buffett said:
Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple…. [It] is an estimate rather than a precise figure.
Morningstar makes what I believe are conservative, logical estimates and performs the necessary calculations. Then they convert their result into a valuation ratio, just as I did with the first two models.
Morningstar’s valuation ratio is 0.86, suggesting that they see Pfizer as 14% undervalued.
Model 4: Current Yield vs. Historical Yield. The last model compares the stock’s current yield to its historical yield. The idea is that if a stock’s yield is higher than normal, it suggests that its price is undervalued (and vice-versa).
Pfizer’s current yield of 4.6% is quite a bit higher than its 5-year average. Once again, I compute a valuation ratio.
Valuation Ratio for Yield Metric = Historical Yield divided by Current Yield
The valuation ratio in this case is 3.8% / 4.6% = 0.83, or undervalued by 17%.
Averaging the four valuation models, I arrive at a valuation ratio of 0.94, indicating that Pfizer is fairly valued, meaning it is within +/- 10% of the calculated intrinsic value.
Pfizer’s recent price is $34. Its calculated fair price is therefore $34 /0.94 = $36.
Because valuation is a process of assessment (rather than physical measurement), I normally give myself 10% wiggle room on the upper edge of the price I would pay for a high-quality stock such as Pfizer. Doing that, I come to these conclusions:
Pfizer’s fair price = $36
Pfizer’s maximum buy price = $40
Beta measures a stock’s price volatility relative to the S&P 500. I like to own stocks with low volatility, because they are easier to live with.
Pfizer’s 5-year beta of 0.68 compared to the market as a whole (defined as 1.0) means that its price has moved 32% less than the market. This is a positive factor.
CFRA’s current report on Pfizer shows that the average opinion grade of 23 Wall Street analysts is 3.6 on a scale of 0-5. That translates to Buy/Hold. This is a neutral factor.
The Bottom Line on Pfizer
- High yield (4.6%), good dividend safety score (75 /100 SSD score).
- Very high business quality ratings from independent analysts. Highest financial and safety grades from Value Line and moat rating from Morningstar. Many believe that Pfizer improved itself by getting rid of the Upjohn unit.
- Good portfolio of blockbuster products not facing near-term patent cliffs, plus strong pipeline of products in various stages of development.
- Coronavirus vaccine presents at least a one-time revenue “windfall,” and the need for coronavirus vaccines may extend for several years.
- The mRNA technology used in development of the coronavirus vaccine may prove to be a good platform for future vaccine development in a variety of areas.
- Good financials, although a little hard to interpret given the one-time impact of the Upjohn divestment and the revenue impact of the coronavirus vaccine, which may or may not be extended. Excellent profitability, cash flow generation, and long-term share count reduction.
- Fairly valued.
- Dividend growth has been slowing for several years. This year’s small raise (2.6%) may be reversed, or even become a small overall reduction, in conjunction with an adjustment for Viatris’ dividend.
- Some financials are just OK: Revenue growth (although that picture is clouded by the Upjohn spinoff and the coronavirus vaccine), ROE, and debt are all average, not stellar.
Conclusion: In my opinion, Pfizer is an interesting high-quality opportunity in the Health Care sector. There may be a small dividend reduction in the next quarter, but Pfizer would still be a high-yielding stock afterwards. Who knows, if that happens, Pfizer’s price may correct a little in response, providing an even more attractive entry point than now. Currrently, the stock is fairly valued.
This is not a recommendation to buy, hold, sell, trim, or add to Pfizer. Any investment requires your own due diligence. Always be sure to match your stock picks to your personal financial goals.
Other Reading on Pfizer
Warren Buffet’s Latest Stock Trades (Jason Fieber, February 2021) – In something of a head-scratching move, Berkshire Hathaway sold out of 3.7 million shares of Pfizer about half a year after they bought them. As a side note, Jason estimates a fair price of $41 for Pfizer, so he said this looks like a buying opportunity.
Undervalued Dividend Growth Stock of the Week: Pfizer (PFE) (Jason Fieber, July 2020)
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