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Acquisitions, Strong Sales Keep Pfizer Dividend Strong

Future growth will not be difficult for this big pharmaceutical stock


Pfizer (NYSE:PFE)Pfizer (NYSE:PFE) is one of the largest global biopharmaceutical companies. The company operates in two distinct segments — biopharmaceutical and diversified. The biopharmaceutical segment is its global prescription care business that has a large portfolio of patented drugs and treatments, while the  diversified segment comprises its large over-the-counter business for consumer and animal health products.

Many pharmaceutical companies have the same problem the oil companies had in the 1980s. They grew very large and are wondering how to grow further as the law of large numbers suggests that their size prevents them from accelerating growth. With a slew of patent expirations due to hit the industry in the next several years, drug companies are trying to find ways to return cash to shareholders. One way is to pay high dividends as stagnant revenue growth (7.5% for the last quarter), but good operating margins (27.8%) leave a good cash generating ability which allows for 3.7% forward annual dividend yield on a 54% payout ratio.

The capital structure does have $41.1 billion of debt outstanding, but also $29 billion in cash to net most of it out. Even if Pfizer goes into a situation where a number of patents expire as new ones are introduced and revenue stays stagnant for some time, the shares offer excellent potential for income-seeking investors with the current dividend yield. Pfizer did cut its dividend in 2009 from 32 cents a quarter to 16 cents, but at the time the payout was unsustainably high (usually, when shares yield 8% to 9% this is because the market does not believe in the sustainability of the payout). The current payout is much more sustainable and the company has resumed dividend growth from the 16-cent quarterly rate two years ago to the current quarterly rate of 22 cents.

The shares offer a value investment at present of 9.4 times earnings and 1.85 times book value. The company is doing a lot to revitalize the business by acquiring companies with promising drugs — like King Pharmaceuticals — and leveraging its vast distribution network to increase sales. Management is also selling more stagnant divisions such as Capsugel, a unit that makes wholesale pill casings with $750 million in sales in 2010. Pfizer used proceeds from the deal to expand a $10 billion share repurchase which should be supportive of the stock in the present environment.

Article printed from InvestorPlace Media,

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