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3 Reasons to Buy Pfizer

By Zhiyuan Sun – Aug 2, 2020 at 9:16AM

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Here's why shares of this blue-chip pharma stock are on the verge of a breakout.

The COVID-19 pandemic has made this a unique time to invest in healthcare stocks. Some companies in the sector have already seen remarkable rallies thanks to experimental coronavirus treatments and vaccines, and many are on the verge of breaking out -- or breaking out further.

Take the example of blue-chip large pharmaceutical stock Pfizer (PFE 0.82%). Its potential to develop a functional coronavirus vaccine aside, I believe there are three reasons now is the time to invest in the company. Let's take a look at why.

Two doctors looking at pill bottle

Image source: Getty Images.

Guidance increase

At first glance, Pfizer's financials do not look all that impressive. In the second quarter of 2020, the company reported an 11% decline in revenue and a 32% decline in its net income compared with Q2 2019. However, after adjusting for the spin-off of its consumer healthcare division, which generated $862 million in Q2 2019, the company only saw its revenue decline by 3% to $11.8 billion. Similarly, if Pfizer's non-cash expenses (such as depreciation and amortization) are added back to its net income, then the company's adjusted earnings only fell by 3%.

As the COVID-19 pandemic raged on in the U.S., Pfizer's sales team was unable to meet with healthcare professionals in person to generate new prescriptions. Impressively, however, the company witnessed no supply-chain disruptions and has rebooted enrollment in its clinical trials.

What's comforting to investors is that the company is sticking to its annual guidance, and is even raising certain expectations. For fiscal 2020, Pfizer now sees between $48.6 billion and $50.6 billion in revenue and adjusted earnings per share of $2.85 to $2.95, which are signs that its underlying businesses are making a quick comeback.

Robust biopharma segment

Pfizer's best-performing segment during the most recent quarter was biopharma, which grew 9% sequentially in terms of revenue. Its most notable achievements include continued momentum in Vyndaquel/Vyndomax, a drug that treats cardiovascular disorders. Approved just last year in the U.S., Vyndaquel/Vyndomax now generates $277 million in sales per quarter and is seeing up to 140% sequential growth in international markets. Additionally, Inlyta, an immune checkpoint inhibitor for treating cancer, saw 120% sequential growth.

Solid dividend

What's more, the $12 billion Pfizer generated in its Upjohn spin-off will be more than enough to cover its dividend obligations this year. Pfizer is one of the most shareholder-friendly companies in the pharma sector, with $4.2 billion in dividends paid in the past quarter. At $0.38 per share, that's a yield of 4% per year, double the S&P 500's average of 2%.

Pfizer's dividends are more than covered, given its $10 billion to $11 billion in operating cash flow. That represents a payout ratio of just under 40%.

What's the verdict?

Going forward, Pfizer is trading at 4.3 times price-to-sales and 20.5 times price-to-earnings. While that's slightly on the expensive end for a pharma, keep in mind that investors will be getting a lot for their money. Notably, this is a solid blue-chip stock that increased its guidance during the coronavirus crisis, pays a solid dividend, and saw respectable growth in its biopharma segment. Hence, I think Pfizer would be an ideal dividend stock for investors interested in the healthcare sector.

Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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