Dividend Analysis - Pfizer Inc. (NYSE:PFE)
20 June 2007Today we will look at another S&P 500 Dividend Aristocrat - Pfizer Inc. which trades on the NYSE under the symbol PFE. It is currently sporting a very high dividend yield at 4.4%. So let’s have a look at this one.
Company Profile:
From Yahoo Finance
Pfizer, Inc. engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals in the United States, Europe, Canada, Asia, and Latin America.
For a more detailed list of the company, check the listing at Yahoo Finance. This is definitely a large cap stock with a market capitalization of $183.95B.
Company Fundamentals:
I always like starting with the Return on Invested Capital to see how well management is using its capital. I see that management has done an excellent job, but the return has been steadily decreasing over the 10 year period. From 1999 to 2002, ROIC was better than 35% each year. Since then, they have had a much lower ROIC in the mid teens range. The 5 year average is 16.40%.
The Return on Equity confirms this trend. The 10 year average is 29.11%, the 5 year average is 22.69% and last year’s ROE was 16.81%. Not the trend that I want to see in management’s ability to deploy their capital.
The equity growth rate is nothing to write home about. Unfortunately, there was one year in 2003 where Pfizer had an equity growth rate of 164%. And unfortunately, that throws off all the averages! The 10 year average is 25.45% and the 5 year average is 38.32%. Yet, if you take that one year out of the equation, Pfizer has not had an equity growth rate over 15% in any of those other 9 years. So, if I look at the average equity growth with 2003 taken out, I get 7.25%.
Earnings per share growth rate has been on a steady decline as well. Over the 10 year period, the earnings per share growth rate was 13.03%. The 5 year rate is 6.54% and last year, Pfizer had a negative growth rate of 1.18%.
Sales growth rates have been negative for the past 2 years.
The company fundamentals seem to be spiraling downwards on all fronts.
Dividend Fundamentals:
As stated at the beginning of the post, Pfizer currently offers a whopping 4.4% dividend yield. Of course, that blows away the dividend yield of both the S&P 500 and DJIA.
Not only does Pfizer have an incredible dividend yield, but it also has amazing dividend growth over the past 10 years! The average over those 10 years is 17.32%. The 5 year average is 15.90% and the 1 year average is 26.32%. With their declining company fundamentals, how is Pfizer able to keep up this torrid pace of dividend growth?
Even their cash flow growth rate has been sub par. The last two years have shown negative cash flow growth rates. So how are they paying for these juicy dividend increases?
For one, their payout ratio has been increasing steadily from a low of 40% in 1997 to 57% in 2006. And throughout the 10 year period, the dividend payout ratio has been all over the map. From a high of 67% to a low of 33.59%. However, if they keep their dividends growing at their current rate, this dividend payout ratio must go up.
Historical Dividend Yields:
The 10 year average high dividend yield is 2.17%. Looking at just the 5 year average high dividend yield, I see 3.09%. From any yield measure that you want to look at, Pfizer would appear to be selling cheap. Investors have never in the last 10 years allowed the yield to get this high.
Using the 5 year average high yield, then I determine that this stock is selling at a 30% discount!
let’s look at our other valuation methods to see if they show the same discount.
Graham Number:
The Graham number comes in at $19.95. That would be a premium of 31.61%.
Present Value:
Calculating the present value was difficult for Pfizer. To calculate the future EPS growth rate, I use the historical equity growth rate of the company. However, that one year in 2003 throws all the averages out of whack. However, if I take that one year out, then the equity growth rate over 9 years was 7.25%. Let’s use that as a starting point.
The analysts have been even harsher than my estimate, and they have a future EPS growth rate of just 5%. Let’s go ahead and use their number.
Looking at the historical P/E information, I can see that the P/E has been tumbling down from the 10 year P/E of 31.02, to the 5 year P/E of 20.86, to the current P/E of 14.84. However, the typical P/E should be around 2 times the estimated EPS growth rate. So that gives us a future P/E of 10.
Using all this information, I came up with an intrinsic value of $7.13. That number is much, much lower than the Graham number.
You can find all my calculations here.
Conclusion:
Well, my 3 different valuation methods are showing conflicting results. The yield method shows that Pfizer is trading at a deep discount. The Graham number shows that the stock is currently overvalued. And calculating the future stock price and discounting that back to the present, the analysis shows the stock is very overvalued.
The growth outlook for this stock looks fairly dim. Even the analysts have pegged it at 5%. Although there is room to increase the dividend payout ratio, I cannot see how this stock can continue to offer those huge dividend growth rates. With some of their major drugs about to go generic, Pfizer really needs a home run from a new drug that is hopefully coming up their drug pipeline.
Disclosure: I do not own any shares in Pfizer Inc (PFE)
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on June 25th, 2007 at 9:00 am
[…] Matter presents Dividend Analysis - Pfizer Inc. (NYSE:PFE). Pfizer has an all time high yield of 4.4%. However, growth looks dim so the yield might be all you […]
on July 13th, 2007 at 8:45 am
Conflicting fair value nos seem to be everywhere. S&P’s stock rpt on PFE puts fair value at $26.5.
on July 31st, 2007 at 12:45 am
I guess that with aging population to X 2 in next 10 years…you should’nt worry for Pfizer…BUY AND HOLD IT FOR 10-15 years with yield at 4.9% you can’t go wrong…..
Pharma 2020: The vision Print-friendly version
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Which path will you take?
By 2020 the pharmaceutical market is anticipated to more than double to US$1.3 trillion, with the E7 countries — Brazil, China, India, Indonesia, Mexico, Russia and Turkey — accounting around for one fifth of global pharmaceutical sales. Further, incidence of chronic conditions in the developing world will increasingly resemble those of the developed world. But Pharma 2020: The vision - which path will you take? indicates that the current pharmaceutical industry business model is both economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets. In order to make the most of these future growth opportunities, the industry must fundamentally change the way it operates.
Some of the major changes PwC anticipates for the industry are:
Health care will shift in focus from treatment to prevention
Pharmaceutical companies will provide total health care packages
The current linear phase R&D process will give way to in-life testing and live licensing, in collaboration with regulators and health care providers
The traditional blockbuster sales model will disappear
The supply chain function will become revenue generating as it becomes integral to the health care package and enables access to new channels
More sophisticated direct-to-consumer distribution channels will diminish the role of wholesalers.
on November 21st, 2007 at 9:11 pm
Since June Pfizer lost over $31B value From $183B to $152B at $22.35 today I guess PFIZER with a woooping 5.7% dividend may interest you…
PFIZER will boost Dividend to $0.31-$0.32 in december= $1.28/ $22.35 =5.7% better than banks and safer with Dividend cut coming from Citigroup and other financials who need to raise Capital
LONG WE GO…