In Special Report: Meeting Your Retirement Challenge on my subscription site JubakAM.com, I suggested that when temporary factors created an opportunity to buy the shares of a solid, predictable, cash flow generating company, with a yield of 4% you should jump at the stock.
Well, Pfizer (PFE) after some weakness this week on news that the governors of the Dow Industrial Average were kicking the stock out of the index, has hit my dividend buy range near 4%. (We’re bouncing around near 3.99% and 4.00% as of 3:30 p.m. New York time today.) I’m adding it to my Dividend Portfolio today. Pfizer shares are down 2.22% in the last week as of the August 27 close.
The action by the Dow governors says very little about Pfizer’s prospects. In my read it’s an move designed to removed a big overlap in the index with Merck (MRK) and to give the index room to add more technology exposure now that the impending split at Apple (AAPL) will reduce that stock’s weight on the strange share-price-weighted index. ExxonMobil (XOM) and Raytheon ( RTX) were also dropped from the Dow. The three replacements are Salesforce (CRM), Amgen (AMGN), and Honeywell (HON). And the drop will do very little to reduce index cash flowing into Pfizer since very few index funds track the Dow Industrials in comparison to the Standard & Poor’s 500 index.
Still Pfizer doesn’t need to borrow volatility right now. It’s coronavirus vaccine efforts with BioNTecn (BNTX) push the stock higher on days when the market is optimistic about the quick delivery of vaccine trial data to the U.S. Food & Drug Administration. (Pfizer and Moderna (MRNA) are among the leaders in the vaccine race). And send the shares lower on days when investors rediscover their skepticism about the timing for getting a vaccine to market.
The reasons to buy Pfizer now have very little to do with its ticket in the vaccine lottery and quite a bit to do with the company’s decision to spin off its slower growing and lower margin generic division (through a spin off Pfizer’s Upjohn unit and then a merger with Mylanin the fourth quarter) and with the gradual lessening of the rate of decline in sales of Lyrica, which came off patent last year, in the face of generic competition.
Pfizer’s huge cash flow enables the company to invest heavily in the development of new drugs. Investment doesn’t always equal success, however, and Pfizer’s new drug development pipeline has been in something of a dry spell., That looks likely to end in 2021 with the company to launch potential blockbusters in cancer, heart disease, and immunology. On the horizon is Pfizer’s next-generation Prevnar pneumococcal vaccine.
The company has a good record at raising dividends in recent years from $1.28 a share in 2017 to $1.36 in 2018 to $1.44 in 2019 to the current $1.52. The recent yield of 3.99% is higher than it has been in data stretching back seven years. The payout ratio for the past 12 months is 58.50%, well below the five-year average of 71.79%.
The stock has a forward projected price to earnings ratio of 13.28, well below the 21.94 forward estimate for the S&P 500.
Full dislosure: I will be adding shares of Pfizer to my personal portfolio next week.