Two adages capture the dilemma investors face when they consider buying a beaten-down stock:

  • "Don't try to catch a falling knife."
  • "Buy the dip."

These well-known sayings seem to be contradictory. However, they're not when taken in the correct context. Some sinking stocks have poor underlying businesses and should be avoided -- just like a falling knife. Others have solid underlying businesses and are likely to rebound over time.

I think Pfizer (PFE 1.29%) falls into the latter category. This S&P 500 dividend stock could be the best bad-news buy on the market.

Bad news and more bad news

Admittedly, a quick look at Pfizer's stock chart screams "falling knife" a lot more than it does "dip." The big drugmaker's shares have plunged 35% over the last 12 months, while the S&P 500 has jumped close to 25%.

Pfizer's bad news started with sinking COVID-19 revenue. Sales of its COVID-19 vaccine Comirnaty fell 70% last year, while sales for its oral COVID-19 therapy Paxlovid plummeted 92%. The company expects combined sales for the two products to decline another 36% in 2024.

There's more bad news on the way that's unrelated to COVID-19: Pfizer faces a patent cliff. Eight of its products will lose U.S. patent exclusivity by 2030. They include some of the company's top-selling drugs such as Eliquis, Ibrance, Xtandi, and Vyndaqel.

How hard will these exclusivity losses hit Pfizer? The big drugmaker projects an annual revenue impact of around $17 billion per year by 2030. To put that figure into perspective, the company's total revenue last year was roughly $55.5 billion.

Rays of sunshine peeking through the dark clouds

Now for some good news: Several rays of sunshine are peeking through the dark clouds for Pfizer.

First, the company has been highly successful at winning approvals for new products and new indications for existing products. In 2023, Pfizer notched a record nine U.S. Food and Drug Administration (FDA) approvals for new drugs and vaccines.

The company projects that new product and indication launches made through the first half of this year will add around $20 billion in annual revenue by 2030. Note that this is a risk-adjusted projection that's well above the anticipated negative sales impact from the looming patent cliff.

Second, the big pharma company has been busy gobbling up smaller drugmakers. One transaction wasn't so small, with a $43 billion price tag for Pfizer's acquisition of Seagen. The company thinks its business development deals will generate $25 billion in new annual revenue by 2030.

Third, Pfizer should have other new drugs on the way that weren't included in either of the previous two projections. For example, promising cancer therapy disitamab vedotin and flu vaccine PF-07252220 are being evaluated in late-stage clinical studies.

The best bad-news buy on the market?

I can't leave out Pfizer's exceptional dividend yield of 6.3%. The dividend is likely to increase, based on Pfizer CFO Dave Denton's comments during the company's fourth-quarter earnings call. With such a high yield, Pfizer doesn't have to deliver much share-price growth to give investors attractive total returns.

Unsurprisingly, Pfizer's valuation also looks appealing. Shares currently trade at 12.7 times forward earnings. By comparison, the forward earnings multiple of the S&P 500 healthcare sector is 18.5.

Is Pfizer really the best bad-news buy on the market? I think it just might be.