Sep

14

What About Pfizer (PFE)? (High Yield) - HOLD

September 14, 2007 |

I was asked about my opinion in Pfizer (PFE), especially with its 4.8% dividend yield. Any time I see a dividend yield above 4% I start liking a company: they show real cash, not just paper cash. However, I live on more than dividends: I look for growth also – and for this, I need to do some more research, as explained below.

I like the concept of pharmaceuticals: they save people, and saving people is always in fashion. The only problem with pharmaceuticals: people are not willing to pay to be saved. Many people in socialist countries expect medications to be given to them for free, as an act of charity, regardless of all the money invested in research and development by the pharmaceutical company. And I believe that this is going to happen in the US. As the U.S. health care system becomes more socialized, pharmaceutical companies will be pressed to sell their drugs at discount or will be relieved of their patent exclusive rights to producing the drugs they researched for so many years.

Pharmaceutical companies are smart. They have been moving into drugs that other countries don’t want to socialize. For example, Viagra: most companies don’t like to subsidize their citizens rolls in the sack. Other drugs are those that combat obesity, cholesterol, and diabetes: people in most socialist countries are not so prone to some diseases, in part because they are not overweight. Finally, many drug companies have started to invest in beauty drugs, like Botox, which most countries will not socialize. Companies that invest in these kinds of drugs will probably fare better than if they didn’t.

There is one kind of pharmaceutical that can benefit from the socialized health care trends: those that make generic versions of the patented drugs. As the patents expire, or as the governments of the world force their expiration in one way or another, these companies will be the ones ready to start generics production without having any losses due to the loss of intellectual rights. Glaxo (GSK) is one of these companies which may benefit, with a 3.7% dividend yield, and a growth expectation of 16.2% this year. Still its PEG ratio (2.9 is too high, and their next 5 years growth is a dismal 4.72% per year).

The Good:
P/E: 9.86
Dividend: 4.80%

The Bad:
Price To Earnings Growth (PEG), based on analyst expectations, is 2.73 (I like them with a Price / Earnings / Growth ratio of less than 2.00) – very little growth expected. Current quarter is expected to grow -1.9% (negative). This year? 2.9%, and next year? 9.9% (below what some of the other companies in the industry are expected to grow). Next five (5) years growth expectations: 4.18%. A bit small.

The Ugly:
Revenue consistency – They negatively surprised the street on June 2007 with earnings 16% less than expected. That was after surprising them positively by almost 20% on March 2007. It is difficult to predict grow on a company like this.

At this point I don’t think Pfizer (PFE) is at the top of my high yield dividend companies. I will give it a HOLD “recommendation”: don’t buy more, and if you see better investments, move the money you have in your current position to those better investments. I would prefer to invest in others I have mentioned. However, I don’t think it is a terrible choice: just a stock that is expected to grow slowly. I will probably keep investing in the other stocks that I have mentioned.

Would you like my opinion on another stock? I would love to give you my opinion on the stocks you request, and I would love to hear your opinion as well. It is a good exercise that could benefit the both of us. Leave a comment.


Comments

1 Comment so far

  1. js on September 14, 2007 3:39 pm

    Awesome analysis on pfe!

    What about Costco (COST)?
    Tell me your thoughts…the yield may be a little low for your taste and the valuation is a bit on the high side. Is it prudent to pay a premium for a great company (a la buffet)? I know this stock and company well. Although the retail sector worries me a bit, I think the management is a class act and they treat their loyal employees very well.

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