Here at The Motley Fool, we sing the praises of Warren Buffett quite often -- and with good reason. Buffett, in a hair over 60 years, turned a small fortune of around $10,000 into a net worth of more than $70 billion as of this past Friday. Clearly, Buffett is doing something right, and it's worth paying attention to what Buffett does so that others can emulate his ideals and perhaps garner some of the success that he's been privy to over his lifetime.
Warren Buffett's investing strategy is actually a lot simpler than those unfamiliar with the Oracle of Omaha might have suspected. With money managers dicing in and out of stocks on a daily basis these days, Buffett is among the few stalwart investors left that still views buying into a stock as making an investment in to the business model itself rather than just purchasing a stock symbol.
Buffett takes a long-term approach to his investments, removing emotions and market timing, and instead focuses on businesses which can stand the test of time. A great way of thinking about Warren Buffett's investing strategy is to imagine buying a stock that you aren't able to sell for 10 or 20 years. If you'd feel comfortable holding onto a stock for that long then you're thinking like Buffett. In addition, Buffett also tends to favor companies that pay dividends, and which are easy to understand.
Though Buffett's conglomerate Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is weighted toward its bread-and-butter financial sector, it does delve into the healthcare arena from time to time. Yet, one company you won't currently find in Buffett and Berkshire's portfolio is the world's largest pharmaceutical company by revenue, Pfizer (NYSE:PFE). Today, we'll take a closer look at whether or not Pfizer would make a perfect fit for Warren Buffett's portfolio.
Ways Pfizer hits the mark
In a number of ways Pfizer exudes a lot of the characteristics Buffett would look for in a great healthcare investment.
To begin with, Pfizer is a cash flow cow, and as such pays out a consistent and delectable dividend. Despite halving its dividend in order to temporarily reduce its cash outflow and purchase Wyeth for $68 billion in 2009, Pfizer's payout has nearly tripled from $0.09 per quarter in 2000 to $0.26 in 2014. Based on Friday's closing price Pfizer was yielding 3.5%. By comparison, the average yield of S&P 500 companies was closer to 2%, meaning Buffett and Berkshire would be netting a considerably above-average annual payout by owning Pfizer's stock.
In addition, Pfizer offers a lot of diversity in its existing and developing product pipeline that would make any investor, including Buffett, quite happy. Pfizer is delivering steady growth in emerging markets, it has a handful of rapidly growing oncology drugs, and it's positioned to benefit as a go-to pharmaceutical provider for a number of chronic conditions. Also, the company was boasting a clinical-stage pipeline of more than 80 drugs as of August.
Finally, pharmaceutical companies tend to boast excellent pricing power, especially in the U.S. where demand for pharmaceutical products is higher than anywhere else in the world. With many of its best-selling drugs protected from generic competition Pfizer has the ability to boost its prices in order to cover its research and development costs, as well as finance shareholder incentives like share buybacks and dividend increases.
But, Buffett may not like this
However, Pfizer also misses the mark in certain aspects, too.
For example, Buffett really enjoys easy to understand businesses. The reason companies like Wal-Mart, Visa, and General Motors have found their way into Berkshire's portfolio is their business model is really easy to understand. Basic retail trends for Wal-Mart, spending trends for Visa, and the combination of the two for GM are the key factors that an investor would need to keep track of in order to get a decent grasp of these businesses.
Now take a closer look at Pfizer. An investor needs to be able to keep track of patent expiration dates -- patents are issued for a period of 20 years and often begin when the Food and Drug Administration gives a biopharmaceutical company clearance to begin human clinical testing for an experimental drug -- as well as, in Pfizer's case, the advancement of close to seven dozen clinical studies!
Sure the diversity of its existing and developing pipeline allows for some cushion in case a study fails, but Buffett has demonstrated an unwillingness to monitor his investments on a day-to-day basis. Buffett really prefers the set-it-and-forget-it strategy, which may not work as well with a pipeline as large as Pfizer's.
Warren Buffett's investing strategy also involves buying businesses that require little maintenance. For pharmaceuticals like Pfizer they do have healthy margins, which is a big plus in Buffett's eyes, but their finite patent expiration period means that unless they remain innovative their dominance may only last for a decade, give or take a few years. In other words, Pfizer's business model needs constant adjusting, which may not sit well with Berkshire or Buffett.
Is Pfizer a perfect fit for Warren Buffett's investing strategy?
Now let's return to our initial question: Is Pfizer a perfect fit for Warren Buffett's investing strategy?
While I believe Buffett would appreciate Pfizer's steady cash flow, low volatility, impressive dividend, product diversity, and exceptional pricing power, the simple fact that pharmaceutical companies require constant attention to detail with regard to clinical trial updates would be far too complicated for Buffett. Buffett simply wouldn't have the time or energy to devote to following Pfizer's clinical updates, no matter how intriguing its oncology or anti-inflammatory pipeline might appear.
I also remain a bit concerned about its longer-term growth prospects. Buffett prefers consistent business models that require little maintenance. Pfizer, on the other hand, is in the middle of a major patent cliff that could stymie its top-line growth for years to come. Cost-cutting and share buybacks help mask that dearth of growth for a bit, but it's not a long-term solution, and I believe Buffett right now would see right through these EPS-boosting tactics.
Although Pfizer may find plenty of support from Wall Street and hedge funds, it's unlikely that Buffett or Berkshire will be looking to add the pharmaceutical giant to its portfolio anytime soon.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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