Though the COVID-19 pandemic still isn't definitively over, the work of large pharmaceutical companies to bring vaccines and treatments to market has restored confidence throughout most of the world. For the first time since early 2020, life has resumed more of a normal routine in recent months.
Much of that debt of gratitude for being able to return to normalcy is owed to the pharmaceutical behemoth Pfizer (PFE -3.85%). Alongside its German partner, BioNTech, the New York-based company brought the first COVID vaccine to the U.S. market in December 2020, billed as Comirnaty. And Pfizer also brought the anti-viral COVID-19 treatment named Paxlovid to market earlier this year.
But with all of its success over the last two years, the important question is as follows: Is the pharma stock a buy for income investors right now? Let's dive into Pfizer's fundamentals and valuation to see if we can address this question.
Clearing a near impossible bar in the quarter
Since its founding in 1849, Pfizer has grown into a gargantuan business. In fact, its $276 billion market capitalization positions it as the fourth-biggest pharmaceutical company on the planet.
Unsurprisingly, with such a massive business, Pfizer's product portfolio is incredibly potent with five products on pace to be mega-blockbusters (at least $5 billion in revenue) in 2022. These include the aforementioned Comirnaty and Paxlovid, the blood thinner brand co-owned with Bristol Myers Squibb known as Eliquis, the pneumococcal pneumonia vaccine franchise called Prevnar, and the cancer drug referred to as Ibrance.
And if that weren't enough, Pfizer also has four drugs on track to haul in at least $1 billion in revenue for this year. These include the rare heart disease drugs dubbed Vyndaqel/Vyndamax, the immunology drug termed Xeljanz, and the cancer drugs labeled Xtandi and Inlyta.
Earlier this month, Pfizer shared its financial results for the third quarter ended Sept. 30. The company reported $22.6 billion in total revenue during the quarter, which was down 5.8% over the year-ago period. But adjusting for the fact that the strong U.S. dollar was a drag on revenue, revenue was down just 2% operationally in the quarter.
At face value, a decline in revenue isn't exactly good news. But given that the demand for Comirnaty has greatly diminished over the last year as most individuals have been vaccinated, this is arguably a decent result.
Comirnaty's revenue plunged 65% operationally year over year to $4.4 billion for the quarter. But this was mostly offset by the addition of $7.5 billion in new revenue from Paxlovid. As health professionals continue to rely on Paxlovid to prevent severe cases of COVID-19 in patients who are at risk, revenue for the product should remain exceptionally good in the next few quarters. And outside of its COVID-19 products, revenue managed to grow 2% operationally during the quarter.
Pfizer's non-GAAP (adjusted) diluted earnings per share (EPS) soared 40% higher year over year in the third quarter to $1.78. Thanks to better operating efficiency, the company's non-GAAP net margin expanded 1,460 basis points over the year-ago period to 44.9% for the quarter. Along with a 0.1% reduction in the outstanding share count from share buybacks, this explains how the company's adjusted diluted EPS exploded higher while its revenue base was relatively flat during the quarter.
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The dividend has wiggle room to grow
Pfizer's 3.3% dividend yield is significantly above the S&P 500 index's 1.6% yield. And the company's dividend should have the ability to run higher in the years to come.
This argument is supported by the fact that Pfizer's dividend payout ratio will clock in at a tad less than 25% in 2022. Needless to say, this provides the company with enough capital to further strengthen its product pipeline of more than 100 projects under clinical development.
Thanks to the low payout ratio, Pfizer can also withstand a temporary downturn in its profits as it attempts to launch enough projects to offset the revenue decline in Comirnaty.
A world-class business at a deep discount
With Pfizer's management expecting to boost its annual revenue base to the tune of $25 billion by 2030 through acquisitions and product launches, the company's future is bright. But Mr. Market doesn't currently see it that way, which could be a buying opportunity.
Pfizer's forward price-to-earnings (P/E) ratio of 9.8 is well below the drug manufacturer industry average forward P/E ratio of 12.2. This valuation builds a margin of safety into the stock if management ultimately falls short of its top-line growth forecast, which makes Pfizer a buy for income investors.
