Should You Trade Pfizer Stock for Shares in Zoetis?

Owners of Pfizer (NYSE: PFE  ) stock have an animal of a decision to make. The pharma giant is giving shareholders a chance to exchange Pfizer stock for shares in Zoetis (NYSE: ZTS  ) , its former animal health business that was spun out in February. Pfizer still owns 80% of Zoetis but is willing to give its shares away to its current shareholders in exchange for retiring Pfizer stock.

Investors certainly don't want to feel like a fish out of water owning a new company, and sometimes a bird in the hand is worth two in the bush.

On the other hand, investors shouldn't look a gift horse in the mouth, especially one that may be the bee's knees.

Curiosity may have killed the cat, but let's chew the cud and take a look at what investors should do with their Pfizer stock. And I'll hold my horses with the animal sayings so we can get through the details.

If investors decide to exchange their Pfizer shares, they'll receive about $107.52 worth of Zoetis shares for every $100 worth of Pfizer shares, although there's a limit of 0.9898 shares of Zoetis stock per share of Pfizer stock. The values will be determined by the average price of the three days before the deal closes on June 19 after the closing bell.

Don't count your chickens before they hatch
The 7% discounts sounds like a good deal, but you have to want to own shares of Zoetis to justify making the exchange. There's no telling what Pfizer shares or Zoetis shares are going to do after the exchange before you might have a chance to sell them. If Pfizer is able to exchange all its shares, it's possible investors will be so happy to have gotten rid of Zoetis that they'll bid up the shares, negating the discount.

Zoetis looks like a solid company. Sales in the first quarter were up 5% year over year, which topped the 4% growth Merck (NYSE: MRK  ) saw with its animal health division and solidly trumped Elanco, Eli Lilly's (NYSE: LLY  ) animal health division, which saw sales up just 2%.

Being the largest animal health company, Zoetis should have some operational efficiencies that aren't available to Merck, Eli Lilly, Bayer, and Sanofi. And it's really the only choice if you want to specifically tap the animal health care market. The animal health divisions are tiny parts of the pharmaceutical companies overall revenue, so they're not likely to move the needle at Merck, Eli Lilly or one of the other larger players.

Pfizer is as happy as a clam
Pfizer isn't doing the exchange out of the goodness of its heart. The company said that a full exit from Zoetis would be accretive to Pfizer's earning per share starting next year.

The exchange will remove Zoetis' earnings that flow through Pfizer's financial statement, but it'll also lower the number of shares outstanding since the Pfizer stock has to be turned in to get shares of Zoetis. The exchange reduces the "per share" in the EPS and increases the earnings by reducing the dividend that doesn't have to be paid on the retired Pfizer stock.

Barking up the wrong tree
This doesn't have to be an all or nothing situation. If you want to own Zoetis, which looks potentially more stable than Pfizer although perhaps with slower growth, consider trading in just some of your Pfizer stock and own both companies.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2013, at 3:18 PM, TheAcsMan wrote:

    For many individual investors, I believe that the answer should be a resounding "NO."

    As with many things there is a bit a the devil in the details.

    The first detail that may adversely impact upon a small share holder is the $30 transaction fee that will be assessed.

    In the unlikely event that every shareholder elects to accept the offer, only 5% of shares will be eligible. FOr the 100 share lot holder, that means 6 shares of Pfizer can be exchjanged for Zoetis. The potential profit is more than eroded by the transaction fee.

    Of course, not all will elect to accept the spin-off, so the potential to offset the cost improves as fewer take the offer and certainly improves with the more shares an individual owns.

    However, then comes the mad rush to lock in that 7.52% "premium." as Zoetis increases its float by 80%. Since Pfizer is nearly 80% owned by institutions, my guess is that they will be better equipped to sell shares before price plummets and much of that premium vanishes.

    Then of course you are left with the sipposed growth shares that are Zoetis, which had been under-performing the parent and offers a miniscule dividend, by comparison.

  • Report this Comment On June 04, 2013, at 10:13 AM, Icutchacokov wrote:

    If Pfizer owns these shares of Zoetis, the shareholders of Pfizer own them also. How can they ask shareholders to purchase these with shares of Pfizer stock,for something they ALREADY OWN.

  • Report this Comment On June 04, 2013, at 1:01 PM, rcs48 wrote:

    TheAcsMan - You mentioned a $30 transaction fee, but I haven't seen this in any of the materials I have received about this exchange or in my search online. Since this would be a concern for low-volume exchanges, can you provide a source for that information?

    Thanks,

    Richard

  • Report this Comment On June 06, 2013, at 12:49 PM, muffy999 wrote:

    Most brokerage firms charge a reorg fee of at least $20 or more for the transaction. It's not charged by Pfizer or Zoetis so it isn't mentioned in their notice. So people with small positions should check with their clearing firm before saying yes.

  • Report this Comment On June 08, 2013, at 8:52 AM, EllenBrandtPhD wrote:

    Brian,

    From an investment point of view, it probably does not matter initially whether one stays in PFE or exchanges for Zoetis.

    But from a Trading point of view, current PFE holders are far better off than current Zoetis shareholders, as the two stocks will converge over the next couple of weeks.

    That's why the MMs took PFE down so seemingly illogically on very weak propaganda that fooled no one.

    Shorts who could cover, covered. And many Hedgies who were out of the stock undoubtedly came back in again in anticipation of June 19th.

    PFE should have a nice little run up until and slightly beyond the 19th, General Market Willing.

    Traders will also realize that the lower share count following a successful conversion is probably not yet fully "into" analyst stats.

    That means several analysts will have to raise earnings and target numbers before the next report OR that PFE will simply be allowed a "surprise" beat. Either way, this is going to be considered a Safe Haven again among its Dow peers, whether or not this summer is as volatile as some would like.

  • Report this Comment On June 11, 2013, at 3:29 PM, splitdecision wrote:

    Got the info (285 pages) on June 10th and must be sent back by June 14th. Thanks Pershing!

    But at least it appears there is little to gain for the small player. Guess I'll pass.

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