Ever look at Pfizer's (NYSE: PFE) 10-year chart? Ugly is about the only word that comes to mind. Sure the S&P 500 hasn't had a stellar performance over the past decade, but Pfizer is down some 55% over that timeframe. What would it take for the company to get from the teens back to $35 or even higher, where it spent much of the first two years of the 2000s?
Pfizer's recently released post-Lipitor guidance can give us a clue of what it might take to get there. Assuming $2.30 in earnings per share, the midpoint of Pfizer's 2012 guidance, here's what the company would need to support various valuations.
|
Price |
Price/Earnings |
|---|---|
|
$25 |
10.9 |
|
$30 |
13.0 |
|
$35 |
15.2 |
|
$40 |
17.4 |
By comparison, Gilead Sciences (Nasdaq: GILD) and its 37% earnings growth last year currently commands a P/E of 16. Unless investors all start drinking the same euphoria Kool-Aid, Pfizer isn't likely to justify a P/E that high. A P/E closer to Amgen's (Nasdaq: AMGN) 13 might be more reasonable if you assume Pfizer's growth prospects in 2012 will be close to the struggling biotech's current situation.
Another way to estimate Pfizer's future price is based on how much cash it's able to throw back to its investors. Pfizer's dividend yield currently sits at 4.2% based on its recently increased dividend. Let's assume in a few years that investors will be satisfied with a yield of 3% -- closer to what Johnson & Johnson (NYSE: JNJ) and Abbott Labs (NYSE: ABT) currently offer -- which is reasonable if the growth prospects are better. Here's how much Pfizer would have to raise its dividend to support a 3% yield at various prices.
|
Price |
Annual Dividend Required |
Increase Above 2010 level |
|---|---|---|
|
$25 |
$0.75 |
4.2% |
|
$30 |
$0.90 |
25.0% |
|
$35 |
$1.05 |
46.0% |
|
$40 |
$1.20 |
67.0% |
The company certainly appears to have plenty of free cash to support an increase in its dividend, although perhaps not as high as the $1.28 per year it offered before the acquisition of Wyeth. Further, over the two years prior to its dividend cut, Pfizer had raised its dividend by 33%. Will it be able to raise it that much over the next two years?
Speaking of acquisitions
As I see it, whether Pfizer can get back into growth mode depends mostly on how well the integration of Wyeth goes.
Management is certainly saying the right things. Martin Mackay, Pfizer's head of R&D, said the merger is going to be so successful it's "going to be used as a Harvard Business School case study." CEO Jeff Kindler is killing bureaucracy, saying, "If I see a committee I blow it up. I'm on a search and destroy mission."
But rhetoric is cheap and past history shows that integrations rarely go as planned. I'm personally inclined to wait on the sidelines and see if management can successfully integrate that whale, risking missing a major move up in the process. If you have more confidence in management's abilities to hit its targets, Pfizer could be a good buy.
Plus you'll get paid to wait
Right now, the aforementioned generous dividend yield is the best reason for owning Pfizer and other drugmakers on the edge of patent cliffs like Eli Lilly (NYSE: LLY) and Bristol-Myers Squibb (NYSE: BMY). If you assume that the risk of shares falling further is fairly minimal and cash flow won't become too depressed when the patent cliff arrives, then a 4.2% yield is an OK return, especially as it comes with the possibility of an increasing stock price if management is able to live up to its rhetoric.
Of course, there are plenty of stocks that will likely offer higher returns even after you combine Pfizer's dividend with any stock appreciation, but those stocks also come with higher risk. Pfizer offers some stability that could provide a solid pillar for some investor's portfolios.
What do you think? Is Pfizer a buy at this point? What are you holding out for? Let us know in the comments box below.
