Healthcare stocks have been out of the market with investors since late 2022. The myriad reasons underlie negative feelings towards the healthcare sector, but in some cases this doa take is not entirely justified. Drug Titan Pfizer (NYSE: PFE) It's the right case.
The drugmaker's stock has lost 47% of its value from its three-year high and is now approaching a historically low positive price-to-revenue ratio (P/E) of just 8.7. Despite having had poor shows over the past few years, here's why Pfizer is my biggest healthcare position:
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Recent political developments have injected uncertainty into the healthcare sector. Robert F. Kennedy Jr.'s confirmation as Secretary of Health and Human Services raised questions about future health policy. However, Pfizer's foundations remain robust, based on strong cash flows generated from a variety of drug baskets.
The company's large scale offers a significant competitive advantage in developing new drugs. This unparalleled weight, combined with a broad portfolio of patent-protected drugs, helped Pfizer build a wide economic moat for its business. In businesses that require many shots of the goal for successful drug development, Pfizer has financial resources and has established research capabilities to support the development of innovative new drugs.
After years of struggling to unlock important new drugs, Pfizer is now launching several potential big hits in cancer and immunology. The company's 2023 acquisition of Seagen significantly strengthens its oncology portfolio, contributing to a remarkable $3.4 billion in revenue for the full year of 2024.
Pfizer's vast financial resources also support major sales forces. The company's commitment to post-approval research provides sales reps with substantial data for their marketing campaigns. Furthermore, major sales forces in emerging countries are setting up Pfizer to benefit from the dramatically increasing wealth of countries such as Brazil, India and China.
Pfizer faces short-term challenges as Covid-19 product sales decline. However, with the exception of Comirnaty and Paxlovid, revenues rose 12% operating year in 2024. The results demonstrate the strength of Pfizer's core business.
With limited patent losses and fewer old drugs after the sale of its off-challenged division Upjohn (now part of Viatris), Pfizer is poised to grow steadily before a massive patent loss hit in 2028.
Pfizer achieved its $4 billion net cost reduction target from its ongoing cost restructuring program, increasing its overall savings target to about $4.5 billion by the end of 2025. Additionally, the company is on track to provide $1.5 billion in net savings from the first phase of its “manufacturing optimization program” by the end of 2027.
These efforts should increase margins over time as Pfizer's basic business grows and new products gain traction. In line with this theme, management has expressed confidence in their ability to return the company to its pre-pandemic operating margin over the next few years, their profitable development and thus reward loyal shareholders.
Perhaps Pfizer's most compelling feature for income-focused investors is its dividends. The company currently offers a dividend yield of 6.7%, well above the S&P 500. (snpindex: ^gspc) A modest yield of around 1.29%.
At first glance, a payout rate of 119% may appear, but it is worth noting that the average of peer groups for dividend-paying pharma stocks is currently above 120%. Increased payment rates are common in the pharmaceutical industry due to the cyclical nature of business and product development.
Pfizer concludes it all by paying 345 quarterly dividends, increasing its dividends for the 16th consecutive year. This impressive track record shows the company's commitment to returning value to shareholders through challenging business and macroeconomic cycles.
From a valuation perspective, Pfizer looks attractive with its fair value estimate of $42 per share, according to Morningstar analyst Karen Andersen. While fair value estimates from analysts are by no means a solid reason to buy stocks, Andersen's view implies a significant rise from current levels.
What lies behind this bullish outlook? Pfizer's financial results for 2024 were strong, with annual revenue of $63.6 billion, resulting in operational growth of 7% year-on-year. In 2025, Pfizer recently reaffirmed its financial guidance, including revenues ranging from $61 billion to $64 billion. Yes, it's not exactly a fierce topline growth, but the company offers shareholders a stable, above average income.
Pfizer faces several risks that investors should carefully measure. For example, competition between two important products is intensifying. Pfizer's huge hit pneumococcal vaccine Prevnar faces competition with Merck's Capvaxive, but the company's leading breast cancer treatment, Ibrance, is under pressure from Novartis' Kisqali.
Furthermore, while the decline in Covid-19 products has been dragged by top-line growth in recent quarters, this headwind is expected to steadily decline from vision over the coming quarters. Pfizer is also facing potential US drug price-related policy reforms.
Finally, and perhaps most importantly, drugmakers are working on the patent cliff for major products such as Ibrance and Eliquis this decade later. The latter is a sluggish blood thin of Pfizer's hugely popular blood registered in the Bristol-Myers Squibb and the Joint Market. New drug launches should provide a buffer against these upcoming revenue declines, but nothing is guaranteed in a highly competitive world of medicines.
Pfizer has won the top spot in my healthcare portfolio for some compelling reasons. The combination of generous 6.7% dividend yields and 16th consecutive year of dividend increases will lead to reliable revenue in uncertain market conditions. This consistency is very important in my investment approach.
With a dramatic 47% of the stock's dramatic 47% falling from its three-year high, what I believe in has created significant and valuable opportunities. With a historically downward forward P/E ratio of 8.7, Pfizer Stock offers a significant safe margin compared to many other large US stocks. After all, the S&P 500 is currently trading at about 20 times the advance revenue.
I am particularly encouraged to operate 12% of the company in non-covid business in 2024. This double-digit growth shows that Pfizer's core business is steadily increasing amid a temporary headwind due to pandemic-related revenue decline.
The wide economic moat built around Pfizer's business also gives us confidence in its long-term sustainability. Patent protected drugs, economies of scale, and strong distribution networks should continue to generate revenues of investment capital that exceed the cost of capital.
I acknowledge the risk, but I think these concerns are more than explained by current stock prices, such as rising payment rates, future patent expiration, and policy uncertainty. In a market with few clear bargains, Pfizer stands out as an opportunity to win high quality businesses at discounts, which has become my biggest healthcare position.
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George Budwell has the role of Pfizer. Motley Fool has jobs at Bristol-Myers Squibb, Merck and Pfizer. Motley Fools have a disclosure policy.
