It's been a tough go for Pfizer (PFE 1.28%). Shares of the pharmaceutical giant are down over 60% from their highs, a multi-year slide since pandemic-related sales peaked a few years ago. But that's not all. Now, new challenges are putting pressure on the stock.
Stocks aren't always on sale just because their prices went down, but Pfizer's storied history and 7.3% dividend yield make it worth checking under the hood to see if the company has what it takes to get back on track.
So, that's precisely what this Fool did. Here is why Pfizer can't seem to get off the mat and whether it's worth buying the dip on today.
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Pfizer has a laundry list of paper cuts
I won't rehash Pfizer's pandemic journey too much. The company developed and sold a vaccine (Comirnaty) and an antiviral drug (Paxlovid) that made billions of dollars during COVID-19. Then, as those sales dried up, the company's top and bottom lines shrank, taking Pfizer's stock price down, too.
But that's old news. More recently, Pfizer has endured a barrage of additional bad news. The company ceased development of Danuglipron, an experimental weight loss pill after it potentially caused a liver injury in a patient. That was supposed to be Pfizer's entrance into one of healthcare's fastest-growing markets.
The political headaches are stacking up, too. New Secretary of Health and Human Services Robert F. Kennedy Jr. has been a vocal critic of the pharmaceutical industry and is no friend of Pfizer's. Earlier this month, President Trump issued an executive order to lower drug prices in the United States.
Then, you have potential tariff policies that could make it harder for Pfizer to strategize how it develops and manufactures its drugs. Lastly, Pfizer is anticipating a $1 billion revenue hit in 2025 due to Medicare changes stemming from the Biden Administration's Inflation Reduction Act.
Phew. It's a mouthful, but these problems seem more like paper cuts than fatal wounds.
However, the company still has good bones
Danuglipron's failure hurts, but Pfizer still has a healthy pipeline that will heavily focus on oncology over the coming years. Then there is the political noise, which investors shouldn't rush to panic over. For example, President Trump's executive order on drug prices lacked a clear framework for what drugs might be susceptible to pricing pressure or how exactly the government would force drug companies to comply.
Acknowledging risks is fair, but try not to overreact to them. Pfizer has a solid financial foundation. The company's credit is investment-grade, and its dividend payout ratio is only 61% of the bottom end of management's 2025 earnings guidance. Pfizer is also beginning a cost-savings program that it anticipates will save it $7.7 billion by the end of 2027. So, that juicy 7.3% dividend yield is likely not a warning sign of a looming cut.
The beauty of low expectations
It seems the market may be assuming the worst. Pfizer trades at less than 8 times its 2025 earnings guidance, which practically values the stock like it's on death's door. For reference, the S&P 500's price-to-earnings ratio is 28. You can see below how the market's expectations for Pfizer's long-term growth have plunged since October:
PFE EPS LT Growth Estimates data by YCharts
The great thing about setting a low bar is that it's easy to step over. With Pfizer's 7.3% dividend, investors only need low-single-digit earnings growth to generate 10% annualized investment returns. Barring Pfizer utterly imploding, that could be a lowball scenario.
Simply meeting 5% growth estimates with no change in Pfizer's dirt-cheap valuation would produce over 12% annually -- boom, Pfizer could be a market-beating stock. The S&P 500 averages 10% returns historically, and its high valuation could drag on the market's future performance.
If Pfizer's growth winds up higher, near where analysts thought it could be last fall, then you might see the stock's valuation rise, which would only turbocharge returns. There are no guarantees, of course. That's why you diversify and own many stocks. That said, Pfizer stands out in a broader stock market that doesn't seem to have many potential home runs right now.
