Investment Thesis
Pfizer Inc. (NYSE:PFE) is one of the world’s largest pharmaceutical firms with sales exceeding $50 billion. The company is currently attractively valued at a blended P/E ratio of 13.3, offering a current dividend yield of 4%. Pfizer is awarded an S&P credit rating of AA and possesses a modest debt to capital ratio of 28%.
Prior to 2004, the company could have been described as a fast-growing dividend paying stock. However, since 2004, operating earnings growth has slowed considerably. Therefore, Pfizer was once a powerful total return producer that has morphed into a high-yielding blue-chip dividend paying stock offering only moderate growth potential and an above-average current yield.
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Consequently, I believe that Pfizer Inc. (NYSE:PFE) is best suited for the prudent income-oriented investor seeking above-average current yield and safety. Therefore, Pfizer might be especially interesting to the retired investor looking for an above-average level of income in order to fund their retirement needs. However, I also intend to demonstrate that capital appreciation potential might also be surprisingly good going forward.
Pfizer It’s All About The Dividend
I recently read an excellent article titled “Pfizer May Be Another IBM” that DoctoRx authored on Pfizer, and thought it was an excellent piece of research on the company. However, there were certain areas of the article that I did not agree with. To be clear, I found that the article contained some excellent insights into some of the company’s past problems, as well as a rather deep look into aspects of their current pipeline. However, the article did not alter my views of the company relative to its current valuation and/or the long-term opportunity for investment that it offers. On the other hand, much of what was written did describe the slowdown in growth that I referenced above.
For example, I disagree with the author’s position that refers to adjusted (operating) earnings as fake earnings. I disagree with that assessment on the following basis.
Diluted or GAAP earnings, which DoctoRx apparently considers his favorite earnings metric, do tell you a lot about the company’s accounting, and in that regard, when I am examining a company I always check diluted earnings as an integral part of my research and due diligence process. However, I rarely utilize GAAP earnings to make either valuation decisions or to make decisions regarding the viability of the company’s dividend paying ability.
The problem with GAAP earnings are that they often include nonrecurring and/or non-cash charges against earnings that have little or no effect on the company’s actual current cash flow. To my way of thinking, cash flow is the most relevant metric relating to dividend sustainability. In my opinion, Pfizer has ample cash flows to continue paying and growing their dividend.
DoctoRX stated the following in his summary: “PFE reported another year in which it did not quite earn its dividend.” Although this is true on a GAAP basis, it is not true when utilizing adjusted operating earnings (so-called fake earnings) or cash flows. Nevertheless, he was technically correct on the basis that he presented it. However, I do not believe that GAAP earnings provide a clear picture of how the business is actually performing on an operating basis.
But perhaps most importantly, and I am simply summarizing my views here, his article was – in my opinion – oriented towards a total return investment. As I will cover extensively later in the video presented in this article via FAST Graphs, I do not believe that Pfizer will necessarily produce market-beating capital appreciation going forward. However, I am not primarily looking to Pfizer as a total return investment. Instead, I’m looking at it as a reliable high-yield dividend paying stock relative to the average company. My attraction is the 4% dividend yield and a relatively high level of confidence that it will grow moderately going forward.
