Why Owning Pfizer Inc. Stock Is Little Better Than Cash

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PFE stock - Why Owning Pfizer Inc. Stock Is Little Better Than Cash

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Pfizer Inc. (NYSE:PFE) investors have had good reasons to stick with PFE stock, but fewer to stay for the long haul. In the near term, Pfizer has promised to send the benefits of the Trump tax cuts back to them, in the form of buybacks that keep the PFE stock price high and dividends that are the reason for owning it in the first place.

The buybacks should hike the stock’s price, lowering its yield. The yield is the reason for owning it, a 32-cent per quarter dividend now yielding 3.68%.

But in the longer run, Pfizer continues to fall off the patent cliff, as protections expire on key profit drivers. The latest to go will be Viagra, which goes generic next month. Pfizer will launch its own generic, which is called sildenafil citrate, but it won’t make as much money.

A Long-Time Laggard

While shares of Pfizer managed to match gains in the S&P 500 through most of this decade, their paths diverged in 2017, with Pfizer falling short. It is up 13.7% for the year, as of Dec. 20, but the average S&P stock is up 18.7%.

Pfizer’s new drugs, like Bosulif for leukemia, are not as financially powerful as drugs like Lipitor whose patents have expired. Pfizer remains a player in the statin market, making the generic atorvastatin, but the margins are much tighter than before.

So it’s buying itself back, the board authorizing an additional $10-billion stock buyback, on top of $6.4 billion previously authorized, and hiking the dividend to 34 cents, effective in the next quarter.

In terms of the PFE stock price, however, it’s a wash, the one offsetting the other. If you’re buying for the dividend, the buyback means your yield will decline. If you’re buying for the capital gain, the buybacks still amount to less than 10% of the float. They don’t provide a lot of lift.

The Numbers Look Bad

Pfizer has long suffered margin pressure. Operating income has declined steadily for years, from almost $16 billion in 2013 to $9 billion in 2016. The company has already topped that figure for 2017, but profit margins have been falling as the year has worn on.

Analysts are expecting 56 cents per share of earnings when it next reports Jan. 30, better than before and enough to justify the dividend hike. And cash flow is strengthening.

The problem is that Pfizer is a singles hitter in a home-run-derby stock market. Its dividend doesn’t look so great when you look at rising interest rates. Its capital gains lag the market.

CEO Ian Read has tried to deal with Pfizer’s problems by taking it offshore, proposing mergers with first, AstraZeneca plc (ADR) (NYSE:AZN), and then Allergan plc (NYSE:AGN). Both would have seen the company move its headquarters to Europe.

In the first case, Pfizer walked away, unable to get the deal.  In the second case, tax rule changes forced it to walk away, and Allergan is since down 20%.

The Bottom Line on PFE Stock

If you are an income investor with a long-term holding in PFE stock, you have seen your dividend rise from 24 cents per share to 34 cents, and your yield looks attractive. If you were a capital gains investor, you should probably have thrown in your hand by now, maybe when the Allergan deal failed to materialize.

If you are looking for a place to put new money, Pfizer is little better than cash. It won’t fall from here, but it won’t go higher, either. It’s safety for safety’s sake.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/why-owning-pfizer-stock-is-little-better-than-cash/.

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