Pfizer (NYSE:PFE) is a buy at current prices. Specifically, at around $35 per share, PFE stock offers investors a fair price, solid dividends and opportunity for growth.
Here’s a closer look at why the giant pharmaceutical company belongs on your radar today.
Pfizer Is On The Move
Pfizer has the resources — it’s a massive company — and track record to create shareholder value. The company boasts an outstanding sales process and owns the pieces necessary to create even more breakthrough future products.
Management has delivered solid fundamental growth over the past decade and recently offered strategy plans for future shareholder value.
Two major developments shape the Pfizer story. First, Pfizer’s Covid-19 vaccine was granted Food and Drug Administration (FDA) approval. Developed in collaboration with German company BioNTech (NASDAQ:BNTX), the approval positions PFE to distribute nearly 50 million vaccine doses in 2020 and perhaps 1.5 billion doses next year.
Of course Pfizer is not the only game in the Covid-19 space. However, vaccine news alone will drive 2020 and 2021 revenue as a complement to the other pipeline activities under way.
The second major development is that Pfizer has completed its spinoff of Upjohn. The net effect is that Pfizer has divested older, lower-margin products. This action cleared the way for higher-margin revenue products in the future.
Translation: Good news for patient Pfizer investors and Pfizer stock.
PFE Stock Is Fairly Priced
My investing philosophy is that “slow and steady makes you rich.” Pay too much for any stock and investors risk years of disappointment. The idea is to pay a reasonable price for a growing company and good things happen over time.
(Side note: “Over time” means a reasonable investment horizon of weeks, months or years).
One way to decide if shares are cheap or expensive is to compare that company’s price-to-earnings ratio to its own history. Pfizer stock was priced around $35 last week. What are those shares worth? With an average P/E at 14X and 2020 earnings estimated between $2.85 and $3.05, Pfizer shares are likely worth $40 to $43.
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Moreover, a 12-18 month price target at $40+ is not unreasonable because Pfizer reached those price levels each of the past 3 years on even lower earnings.
A Solid Dividend While You Hold
Another reason Pfizer is worth a shot is the well-covered dividend. What do we mean by “well-covered”? Pfizer typically pays 60%-70% of earnings to shareholders as a dividend. This leaves the other 25% to 30% to go toward company growth and development.
According to Pfizer, last year in 2020 alone, the company paid $8.4 billion in cash dividends to shareholders.
For the individual investor, buying shares at $35 and earning 4.39% per year in cash dividends is a great way to earn steady income. Additionally, investors can expect that dividend to increase 3% to 5% per year if past history continues.
Give Your Returns a Shot in the Arm
Options-minded investors could consider selling covered calls to juice returns on this predictable company (in this case, “covered” means we already own the shares). Say we believe Pfizer is worth $40 per share. If we bought 100 shares at $35 per share, on recent quotes we could sell a Jan 2023 $40 Call for $2.57.
The math per contract would look like this: We would have a cash outlay of $3,500 per contract to buy 100 shares. We could sell a covered call and bring in $257. The net cash spent would be $3,243.
At contract expiration in January 2023, there are only two outcomes. First, the price of PFE stock is above $40, your shares will be called away and you will receive $4,000. Your profit on the cash spent will be $757. That is an annualized return on investment of 28%.
If the share price is below $40 on the expiration date, you simply keep the $257 premium. This is the same as a $2.57 dividend per share.
Remember you still own the shares and earn dividends during the option contract period. Extra icing on the cake.
Your Take-Away
Pfizer is a steady company with a history of growing earnings and steady dividend. The company has several growth initiatives under way, and the shares are fairly priced. Patient value investors desiring a dividend should take a look, and options-minded investors can increase returns by selling covered calls.
As of this writing, Doug Morse did not have (either directly or indirectly) any positions in the securities mentioned in this article.
