Pfizer Inc. (PFE) Stock: 3 Pros, 3 Cons

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Pfizer Inc. (PFE) should be thankful that the Federal government essentially blew up its deal to buy Allergan plc Ordinary Shares (AGN) because PFE stock has been on a run ever since.

Pfizer Inc. (PFE) Stock: 3 Pros, 3 Cons

Indeed, PFE stock is downright frisky again after struggling for the last three years.

Pfizer stock is up 9% for the year-to-date, outpacing the broader market by more than five percentage points. With a dividend yield of 3.4%, PFE has been a total return hero in a year where gains are hard to come by.

And it’s all thanks to the Allergen deal falling apart.

Pfizer terminated its intended acquisition after the Treasury Department issued new rules on tax inversions that robbed the marriage of its reason for being. Shareholders spooked by the whopping $160 billion couldn’t have been more pleased. PFE has gained more than 7% since early April.

Pfizer is a mammoth company with a number of best-selling drugs and what looks to be a strong pipeline. It also has powerful demographic forces at its back. On the other hand, it’s quite possible that shares are overpriced and destined to revert to the mean for long-term investors. It could trade sideways for years.

To get a sense of whether Pfizer stock is a good buy for investors with long horizons, let’s take a quick look at the pros and cons:

PFE Stock Pros

Dividend. That dividend of 3.4% may not sound like much, but that’s a fairly generous level these days. Only one other mega-cap worth more than $200 billion boasts a higher yield. Even more importantly, PFE pays a dividend you can count on and the company has hiked it for six straight years.

Value. Pfizer stock isn’t a bargain-basement buy, but neither is it very expensive. The forward price-to-earnings ratio of 13.42 is much cheaper than the broader market’s P/E. It’s also not unwarranted given analysts’ average long-term growth forecast of more than 7% per annum.

Strong Pipeline. Top-selling drugs include Champix, Enbrel, Ibrance, Lipitor, Lyrica, Medrol, Norvasc, Prevnar and Viagra, and PFE has a large pipeline to replace its earners once they lose patent protection. The company currently has about 30 Phase 3 projects going. Now that the baby boomers are entering their retirement years, it’s reasonable to think the PFE comes up with some new hits.

Pfizer Stock Cons

Value. As noted above, PFE stock isn’t particularly expensive, but valuation in this case is in the eye of the beholder. Shares are trading at big premiums to their own five-year average multiples, which suggests that the market has priced the growth in and then some. It’s also more expensive than a number of peers. As a 10-year market laggard, it’s fair to question how much longer this brighter sentiment can last.

Dividend. As reliable a dividend payer has been, the multi-year streak of raising its payouts might be coming to an end. At some point, the tightening cycle will become a reality. Dividend stocks will then have to raise their payouts to remain competitive. The company already has a payout ratio of about 95%.

Growth. Pfizer is so huge and lumbering that it is by no means a fountain of growth. Indeed, its projected long-term growth rate isn’t much better than that of the broader market. A number of its best-selling drugs are off patent and there’s always the risk that PFE won’t be able to replace them.

The Verdict

PFE is about as uninspiring a stock as you can find these days, but the pharmaceutical giant has powerful long-term demographics at its back.

The youngest baby boomers are turning 52 this year. The oldest boomers turn 70. Demand for drugs is only going up. After factoring in the healthy dividend, you can argue that it should outperform the S&P 500.

Defensive blue-chip dividend stocks bring stability to any portfolio. PFE is not the kind of stock that keeps you up at night.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/pfizer-pfe-stock-3-pros-3-cons/.

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