Why Pfizer Is An Excellent Long Term Stock
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investment in stock requires a detailed assessment of the performance of the stock looked at in terms of dividend history, cash flow, dividend yield and payout ratio as well as competitive position of the stock and profitability of the company. Here I examine Pfizer's (NYSE: PFE) stock to help you in your decision-making and identify and compare the prime competitors of this company.
One major characteristic about dividend investors is that a stock with large forward yield attracts them. The forward annual dividend yield for Pfizer rated at around 4.2%, which indicates quite a healthy future compared to its peers. The stock has the ability to maintain this payout as illustrated by its payout ratio of about 63%, well within the manageable range.
One point to note, though, is that too high of a forward dividend yield without clear supporting evidence for sustainability does drive investors away. Such evidence may include the company’s ability to meet its short maturing obligations as well as the extent of the company’s gearing, represented by debt to equity ratio. Pfizer has a very reasonable debt funding in its capital structure of about 45%, which is well below the half mark threshold.
The stock has a commanding statistic in relation to dividend per share over the last couple of years. The payout ratio has been more or less consistent in terms of growth, with the company recently increasing the ratio from the previous 55% payout to 63%. The amount payable has also grown from $0.20 per share to $0.22 translating to a 10% increased increment. With the forward annual dividend yield rate estimated at 0.88 from the previous 0.80, the company is indeed very optimistic with its dividend payout. The dividend has grown from $0.16 paid in the year 2009 on the aftermath of the global financial crisis to $0.22 payable on 03/06/12.
Pfizer’s cash revenue declined from $17.4 billion to $16.7 billion in the 4th quarter over the last two financial years representing a 4% fall. This is attributable to an operational decline of $765 million and a gain in foreign exchange of $157 million represented by 5% and 1% respectively from the corresponding period in year 2010. This change appears in the full year revenues though representing a smaller margin of a 1% decline, which is considered immaterial.
The cash flow for the stock has been unimpressive over the last three years despite a commendable recovery in year 2010. Having reported net cash flow of minus $1.234 billion in year 2009, Pfizer reported a cash flow of minus $144 million in the year 2010 before falling again to minus $243 million in the year 2011. The operating cash flows show a declining trend over the last three financial years further creating a question of why the dividend per share grew.
Pfizer faces competition from some of the biggest drug manufacturers like Bayer AG (BAYRY.PK), boasting the highest P/E ratio of about 24.02 in the industry. However, Pfizer’s price/earnings growth ratio, PEG, is much better than that of Bayer depicting a PEG of around 3.30. This is the best PEG ratio in the industry indicating why Pfizer makes a better prospect in this industry. The other key competitors in this industry in the likes of Novartis AG (NYSE: NVS) and Merck & Co. Inc (NYSE: MRK) tend to follow rather than lead Pfizer according to statistics thereby posing a relatively low threat in terms of industry market share. The only area of concern for Pfizer in recent statistics is the overall revenue growth rate which reads minus 4.60% compared to the industry’s average of 10.50%.
In a bid to further strengthen its competitive edge, Pfizer on February 17, 2012 announced through a press release on its website advances made in the partnership with Zhejiang Hisun Pharmaceutical (SSE), a top pharmaceuticals manufacturer in China on a joint venture to produce off patent pharmaceuticals globally. The two giants indicated that they agreed on a memorandum of understanding, by signing the framework seen as the provisional steps toward a successful business. With Pfizer holding 49% on the proposed venture and putting in sum of $250 million, this is quite an attractive stock for investors who optimistically focus on the far future.
Two days earlier, Pfizer received a vote of confidence from the U.S Food and Drug Administration, by accepting the review of their New Drug Application for tafamidis meglumine. The recent rally in the company’s stock has a good line of reference in relation to the recent events despite the fall in revenue in 2011. This stock is not for the bounty hunters, but rather the value investors who seek to benefit from long-term investment in the stock.
These recent events act as a boost to the company’s competitive edge, albeit in the long-term, thereby establishing a very optimistic value for the stock. However, as much of the details to the joint venture are yet to be finalized, some investors will choose to stay coy of putting their money in Pfizer stock for long-term. This means the dividend yield will not be pulled down by forces of supply and demand, but rather will remain attractive for the next couple of years.
Pfizer is therefore an ideal stock for the long-term, in my opinion, meaning you should hold it for at least one year to realize sizable gains. It has good fundamentals to support long-term growth as well as optimistic goals to edge out competition. The stock, however, remains speculative between now and the next three months during which several developments will happen. This is the best time to speculate on Pfizer stock for those not interested in the long-term capital gains and dividends.
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