Perhaps it hasn’t been a great 2017 for Pfizer Inc. (NYSE:PFE), but all things considered, it could have been much worse. The PFE stock price has gained a bit over 11% so far this year. Combined with the 3%+ dividend yield offered by Pfizer stock, total return has been in the 15% range.
That’s a bit worse than the broad market has provided. But in the context of a badly damaged drug space, Pfizer looks like a shining jewel.
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has had a strong year, but remains down 90%+ from 2015 highs. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has been nearly halved. Mallinckrodt PLC (NYSE:MNK) fell 35% in a single day last month and has performed even worse than TEVA so far this year. Even rival Merck & Co., Inc. (NYSE:MRK) has declined in 2017.
Pfizer hasn’t been the only survivor in the drug space this year. But there have been a number of bloodbaths in what historically has been a safe, defensive sector. Particularly in 2017, with the baby boomer generation aging in the U.S. and Europe, and developing countries increasingly having access to prescription drugs, this would seem to be a beneficial environment for drugmakers.
That hasn’t been the case. But for investors looking for the traditionally safe, defensive, dividend-paying health care stock, PFE stock still fits the bill.
Can Pfizer Jumpstart Growth?
Looking backward, Pfizer looks potentially dangerous. Revenue has come down since the beginning of the decade, dropping roughly 20%. Still, the PFE stock price is low enough to stay attractive, and the portfolio diversification provides downside protection.
Pfizer isn’t going to be a torrid grower, and investors should keep their expectations low. But in a market, and a sector, where truly safe stocks are hard to find, PFE looks like a solid choice. And as InvestorPlace contributor Dana Blankenhorn — who’s much more bearish on PFE stock than I am — pointed out on this site this week, operating income has declined as well.
But Pfizer has had to manage its so-called “patent cliff.” Key drugs like Lipitor, Celebrex and Zyvox all have come off patent. Teva’s generic for Viagra hit the market this month. Patent losses are continuing, but the impact is much more gentle: $2 billion a year through 2020, $1 billion in 2021, and under half a billion annually beyond that point.
Meanwhile, there’s a solid and diversified pipeline that should be able to more than offset those losses. Revenue is expected to start rising next year, per Street estimates. Pfizer has estimated that as many as 30 drugs, including 15 potential blockbusters, will be approved.
All told, top-line growth is likely to return, and that should lead profits to rise as well. At the current price, that should be enough for PFE stock to grind higher.
Modest Expectations for PFE Stock
To be sure, I wouldn’t expect a huge rise in the PFE stock price. Blankenhorn called PFE “little better than cash,” and while I’m not quite that bearish, I don’t expect huge returns here.
There are still challenges here, and the new drugs will need to prove themselves. Pfizer still has years of growth to reach early-decade revenue peaks. And with pricing pressure still facing the industry, forecasting anything more than mid- to high-single-digit EPS increases annually seems far too optimistic.
But at the current valuation, that’s OK. Pfizer’s balance sheet is relatively clean, leaving it less susceptible to the debt-fueled collapses seen at Valeant and Teva.
The stock trades at just 13x forward earnings, a multiple that doesn’t incorporate much in the way of growth. But a $10-billion share buyback, due in part to recently signed tax reform, should help EPS. Pfizer also raised its dividend 6%, giving it an attractive 3.5% yield.
It’s a boring bull case, but for PFE stock, boring can be good enough. Investors looking for high-risk, high-reward plays have their choice across the sector, though I wouldn’t recommend Valeant at these levels. For investors looking for income, stability, and a good night’s sleep, however, Pfizer stock is the right prescription.
As of this writing, Vince Martin has no positions in any securities mentioned.
