Every once in awhile, someone will ask me what’s a good stock to buy. That is a loaded question if there ever was one. I usually say it depends on what they hope to achieve by owning it. That’s not a cop-out. Rather, it’s a way to determine if they’re looking to hit a home run or a comfortable single. Pfizer Inc. (NYSE:PFE) and PFE stock is a good example of this.
Depending on what you’re looking to accomplish by investing in Pfizer, I’ll have a better idea whether you should buy, sell or hold.
PFE Stock’s Beauty in Eye of Beholder
I’ll start with existing shareholders who already own Pfizer stock.
If you had owned Pfizer since the market bottom in March 2009, you’ve done astronomically well on your investment. On a calendar-year basis, you haven’t had a down year since then. And 2017 is shaping up to be the first year with a total return in double digits — up 12.3% through November 10 — since 2013.
That’s the good news.
The bad news is PFE stock hasn’t kept up with either the S&P 500 or its Big Pharma peers over the past decade.
So, beauty is in the eye of the beholder.
Sell or Hold PFE Stock
Recently, InvestorPlace’s Lawrence Meyers highlighted the reasons Pfizer might be turning a corner, moving from a slow grower to something a little more robust.
“Big pharma has really struggled over the past several years, and I think that dividend investors have been seduced by their strong cash flow without ever realizing the stocks are wildly overvalued,” Meyers wrote November 2. “Pfizer Inc. reported lousy third-quarter earnings on Tuesday, but that doesn’t mean the stock is priced for such blah results.”
However, take a look back at both its price-to-sales and price-to-cash-flow ratios over the past five years. Those show a stock that is more expensive today than at almost any time in the past decade.
Meyers’ assessment that it has turned the corner is likely right on the money. However, you won’t know for sure until late next year or early in 2019. That means you better be prepared to accept the $1.28 per-share dividend — likely $1.36 in 2018 and $1.44 in 2019 — and not much else.
If you’re good with that, I wouldn’t sell.
I’d continue to hold because with more than $13 billion in free-cash flow (that’s where dividends are paid from) over the trailing 12 months and an FCF yield of 5.5% ($13.2B FCF / $239B enterprise value), which isn’t too shabby in the ninth year of a bull market, you’ve got a very solid company on your hands.
Buy Pfizer Stock
In this scenario, you don’t currently own PFE stock but are considering buying it. Again, it depends on the reasons you want to own it.
If you don’t have a healthcare stock in your portfolio, you might want to look beyond the pharmaceutical industry. Look for potential candidates with more immediate growth prospects.
Take UnitedHealth Group Inc (NYSE:UNH), for example. It is America’s largest health insurer. Its Optum unit is also changing the face of healthcare in the U.S. That will provide the company with a significant growth lever.
While it only yields 1.4%, it’s significantly outperformed Pfizer over the last year, three years, five years and every period beyond that.
I’d gladly give up 220 basis points of yield for outsized capital appreciation. Every day of the week.
However, if you’re an income investor, consider out of the 32 S&P 500 healthcare companies that pay a dividend, Pfizer’s got the highest yield. If you think the company will deliver additional value to shareholders by spinning off its consumer healthcare business, than buying its stock is less of an issue. That’s especially true if its Innovative Health segment continues to perform well.
Bottom Line on PFE Stock
Anytime you can own a company that’s generating so much cash that it could pay off its total long-term debt in less than two years, you know you’re going to receive your dividend check every quarter.
Buy, hold or sell, Pfizer is going to be around next year and the year after that. Sometimes, that’s all you really need.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.