Pfizer after the dividend cut: Still worth a look?
Few things will cause dividend investors to immediately sell a stock, but a dividend cut is one of them. So when pharmaceutical behemoth Pfizer [[PFE]] recently announced that it was halving its annual dividend to $0.64 to help finance its acquisition of Wyeth [[WYE]], the stock was unceremoniously booted from thousands of dividend-focused portfolios – mine included (well, sort of).
However, not all dividend cuts are created equal. While the Wyeth acquisition was widely criticized on Wall Street, it does address the company’s intermediate-term problem of dealing with generic competition eating into its Lipitor profits – which currently account for more than a quarter of its revenue – when its patent expires in late 2011.
And while there certainly may be issues associated with merging the two companies, it’s reasonable to question if at this point – with the stock now trading at 11-year lows in the mid to low teens – much of the expected bad news is already being reflected in the price. In which case, maybe it’s worth another look…
(Soon to be) former Dividend Aristocrat
Assuming the Wyeth deal goes through and the dividend cut takes effect as planned, PFE will be yet another name removed from that elite group of stocks – the Dividend Aristocrats – that have increased their dividends for 25 (or more) consecutive years. In Pfizer’s case it was 41 years, with the last few years showing an annual dividend growth rate above 15%.
The recent dividend level had actually become a cause of some concern among some dividend investors who questioned how it could be maintained given the company’s looming Lipitor patent issue and potential loss of revenue. However, the Wyeth deal and accompanying dividend cut have changed the picture entirely, and it would seem reasonable to expect that the new, lower dividend will be secure, and hopefully able to grow, in the coming years.
PFE: Still a “value trap?”
The Wyeth deal makes it a little more difficult to get a handle on what Pfizer’s earnings may look like going forward – only that they won’t “fall off a cliff” in 2012. Currently, MSN Money shows consensus ’09 and ’10 estimates as $1.99 and $2.29, respectively, with no estimate given for the growth rate over the next five years.
So to be conservative, I plugged PFE’s earnings growth rate over the last five years (5.8%) and the company’s estimated ’09 earnings ($1.99) into a DCF calculator and received a “fair value” estimate of over $22 per share – considerably above the current share price. I also plugged PFE into a couple of other DCF calculators, ValueCruncher and ValuePro, and using their default values I get back nominal intrinsic values of about $48 and $38 per share, respectively.
A further check with Ockham Research confirms that the stock is trading at price/sales and price/cash earnings ratios well below recent historical values – enough so that they rate the stock “greatly undervalued.” So PFE at the $14-$15 level appears fairly cheap – that and the new merger paradigm also appear to make it much less easily labeled a “value trap.”
Nearing the bottom of long-term uptrend channel
A look at a 27-year price chart of PFE shows it approaching the bottom of its long-term uptrend channel (in this case three standard errors below the linear regression trendline). Clearly the stock remains in a multi-year downtrend and the only signs of a potential bottom forming are some positive divergences on the price oscillators.
The 10 price level might be interesting to watch for several reasons:
- It marks the current bottom of the trend channel.
- It’s the present book value of PFE.
- It would represent a dividend yield of over 6%, which in this market might help put a floor under the price of the stock.
Note that this isn’t meant as a prediction – only something that I’m keeping in mind if the stock were to approach that level sometime in the coming weeks/months.
Bottom line:
I’m currently short some LEAPS put options on PFE and could ultimately end up being put the stock at $15 and $12.5. This position was initiated as a way of exiting a long PFE stock position at higher prices (low 20s) while at the same time allowing for the eventual recovery of the losses and/or the initiation of a new position in the stock at much more favorable levels.
I wouldn’t have bothered doing this if I felt that PFE didn’t offer some total return potential looking out over 5+ years, or if the dividend had been eliminated completely. As with my similar LEAPS position in GE, I’ll remain comfortable with the position unless significant fundamental problems develop going forward.
