If you look back five years, Pfizer (NYSE:PFE) was trading at $34. Today, as I write this, Pfizer stock is at $34.50. If not for the dividends, Pfizer shareholders would have made zero dollars from their investment in the drug company during a period that saw the U.S. markets as a whole generate a total return of 8.8%, more than double Pfizer’s performance.
Yet if you bought PFE at the beginning of the bull market in March 2009, and sold at its two-year high of $46.47 in December 2018, you would have gained 241%, and that doesn’t include dividends. Tack on 4% a year for dividend payments and you’re talking about a compound annual growth rate of 17.4%.
I’ll take that every day and twice on Sundays.
Unfortunately, if you bought Pfizer stock in March 1999, you’ve got nothing to show for your 20-year investment except the dividend payments and a 22% unrealized capital loss.
Now imagine if you put those dollars into Amazon (NASDAQ:AMZN)? I’m confident you wouldn’t be nearly as keen about dividend-paying stocks.
While Pfizer seems to have a lot going for it — $10 billion in free cash flow means an FCF margin of 19.3% based on $51.75 billion in 2019 revenue — it can’t seem to deliver capital appreciation for its shareholders on a sustainable basis.
The last time I looked, total return was defined as interest, capital gains, dividends, and distributions realized over a given period. Dividends are great, but without capital appreciation, those stocks are merely risky savings accounts.
Potential Doesn’t Pay the Bills
InvestorPlace contributor Chris Lau recently discussed why Pfizer stock is undervalued by 15%. His argument centers around the idea that Pfizer’s pipeline of new products will push it into growth mode, lighting a fire on the long-stagnating stock.
“The markets are not giving Pfizer’s growing pipeline much of a premium. Pfizer stock trades at a forward price-earnings ratio of 13.2,” Lau commented March 10.
He goes on to discuss some of the company’s success stories in 2019, including Ibrance (revenues up 23%) and Eliquis (revenue growth of 26%), which accounted for 18% of Pfizer’s overall revenue in 2019.
Hey, when you generate $10 billion in free cash flow and almost $52 billion in revenue, there’s no question you’re doing a lot right. However, as Chris points out, Pfizer’s going to have declining revenues over the next two years with growth after that.
Pfizer is expected to have revenues of $48.5 billion to $50.5 billion in 2020, with adjusted earnings of $2.82 to $2.92 per share. Another decline in 2021 and then the revenue floodgates are supposed to open.
Evaluate, a company that specializes in pharmaceutical data, recently discussed Pfizer CEO Albert Bourla’s plan to take the company from one that uses financial engineering and M&A to pad sales, to a company of innovation and drug pipelines, something my colleague alluded.
As a result, Pfizer won’t make any share repurchases in 2020 — it bought back $9 billion worth in 2019 — opting to allocate the capital to the pipeline of drugs it’s developing.
“Mr. Bourla argues that the shedding of legacy products has left Pfizer with a competitive growth profile among its big pharma peers, which might be true, but these prospects are largely being driven by drugs already on the market,” stated Evaluate contributor Amy Brown on January 29.
“Yesterday’s annual results presentation talked up what pipeline progress to expect this year, but in reality, this just highlighted how little there is to speak about.”
So, is Pfizer doing enough to move the ball uphill? Or is it merely dressing up its biopharma segment to look more innovative to investors than it truly is?
The Bottom Line on Pfizer Stock
A year ago, March, I discussed how drug companies like Pfizer were initiating drug price increases without any apparent justification; in many cases hurting the people that could least afford to pay for those increases.
It’s not a new issue, I realize, but it’s a big reason why I’m skeptical of many of the drug stocks.
In Pfizer’s case, it’s trying to sell investors on the idea that it’s a changed company. That it is no longer is about significant M&A transactions and share repurchases, but cutting-edge science.
Those who bought Pfizer in 1999 and are still holding today (there can’t be many) probably thought they were investing in an innovative company. Twenty years on, Pfizer’s still trying to prove they weren’t misguided.
I like my colleague’s enthusiasm for Pfizer. However, I just don’t see it. There are better 4% yields out there if you’re looking for income.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
