A Brief History of Pfizer's Returns (PFE)

A Brief History of Pfizer's Returns

By Motley Fool Staff | More Articles
October 24, 2011 | Comments (0)

Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

Dividends.
Earnings growth.
Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Pfizer (NYSE: PFE ) .

Pfizer shares returned negative 36% over the past decade. How'd they do that?

Dividends actually softened the blow. Without dividends, Pfizer shares lost over 55% during the past 10 years.

Earnings growth was actually positive over the period. Pfizer's earnings per share grew at an average rate of 3.1% over the past 10 years. That's nothing to write home about, but it is positive. Earnings per share are nearly 40% higher today than they were 10 years ago.

So why the pitiful returns? This chart explains it:

Source: S&P Capital IQ.

Pfizer's earnings multiple has absolutely collapsed over the past 10 years. This isn't surprising: By most accounts, shares were grossly overvalued early last decade, and bound to return to earth. The same has been true for competitors Merck (NYSE: MRK ) and Eli Lilly (NYSE: LLY ) -- the market values each dollar of these companies' earnings at a much lower rate than it did in the past.

The question is what happens next. At 14 times earnings, Pfizer looks reasonably valued, but not exactly cheap. The coming decade likely won't be a brutal as the last one, but at this point investors probably shouldn't count on multiple expansion going forward.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

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Fool contributor Morgan Housel doesn't own any of the shares mentioned in this article. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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