Pfizer (NYSE:) reported third-quarter earnings at the end of October, and the results easily beat analysts’ average expectations. They were a much-needed surprise.
That’s because PFE stock has been sinking in recent months. The positive earnings helped boost Pfizer stock a bit, but the shares are still 20% below their 52-week highs.
What’s wrong with Pfizer stock? For one thing, PFE’s earnings have been problematic. While the company reported good results in July, Pfizer significantly cut its earnings guidance.
The reason for the reduction was costs related to the company’s acquisition of Array and expenses associated with the creation of Pfizer’s new consumer healthcare and generics joint venture with Mylan (NASDAQ:). The guidance cut helped reinforce uncertainty about PFE stock. Pfizer is a complicated investment at the moment.
Pfizer: A Drug Company in Transition
With PFE stock, it’s important to realize that investors and analysts are looking at a moving target. The Pfizer of 2025 is going to look far different from the Pfizer of 2005 or 2015. The outlook of Pfizer stock can’t be determined by its past results. So don’t rely on the company’s past revenue and EPS growth rates to try to extrapolate where Pfizer’s business will be in the future.
In the past, much of Pfizer’s business came from well-established drugs, generics, and consumer-focused products. For example, the company had multiple products like Viagra that were off-patent but still generated considerable revenue. The revenue of those older products hasn’t grown much in recent years, however.
As a result, Pfizer decided to spin off its old businesses whose revenue was flat or shrinking into a partnership with generic drugmaker Mylan. Meanwhile, Pfizer is buying more biotech firms in an effort to come up with new blockbuster drugs and recharge its pipeline.
This strategy will change Pfizer from a stable, predictable, high-earnings, low-growth business into one with far more potential. But going forward, PFE stock will also have more earnings volatility and likely have a smaller dividend yield and buy back fewer shares of Pfizer stock.
To see the impact of the new strategy, just look at Pfizer’s Q3 results. In Q3, the sales of PFE’s biopharma division rose 9% year-over-year However, the company’s overall sales dropped 3%, as the revenue losses of its older drugs more than offset the growth of Pfizer’s latest innovations.
The Pros and Cons of the Spinoff
For investors who just want growth, Pfizer’s upcoming spinoff will be a clear winner. By dumping its old businesses, including the generics division, the company will instantly transform itself into a dynamic biopharma company once again. Realistically, with all the drugs in its pipeline and its recent M&A activity, Pfizer’s overall revenue growth could even hit 10% again.
On the other hand, those generic drugs were an absolute cash cow, and Pfizer has been a dividend and share buyback machine in recent years. Over the past five years, Pfizer stock has consistently delivered at least a 6% every year. Net payout is based on both dividend yield and share repurchases. Long story short, PFE has returned a ton of cash to the owners of PFE stock.
Get Paid Well to Trust Pfizer’s Management
If you’re confident in PFE’s strategy, there’s a valid argument for owning Pfizer stock now. The company is continuing to return a meaningful amount of money to the owners of Pfizer stock.
In fact, over the past year, Pfizer’s net payout yield has risen to 11%. That’s because Pfizer stock has a 4% dividend yield. On top of that, Pfizer bought back roughly 7% of the total outstanding shares of PFE stock over the past year. Compared to other blue chip drug makers like Johnson & Johnson (NYSE:), PFE stock is clearly cheaper. It has a lower P/E ratio, and a higher dividend yield, and it repurchases more of its stock. It’s hard to argue with Pfizer stock from a valuation standpoint.
The Verdict on PFE Stock
For investors who don’t mind uncertainty, there’s a good case to be made for picking up some PFE stock now. Focused on more aim-for-the-stars treatments such as cutting-edge cancer drugs, the new Pfizer will have much more potential than the old one that sold well-worn therapies like Lipitor. Additionally, after the 20% decline of Pfizer stock since July, the price of PFE stock has become more reasonable.
However, a solid argument can be made for watching PFE stock and potentially buying it next year. In 2020, the spinoff of the generics business will be done. And the much smaller, more dynamic Pfizer will release its results. Additionally, the company will provide more insight into the dividend yield and share buyback levels that investors should anticipate in coming years.
At the time of this writing, Ian Bezek owned JNJ stock. You can reach him on Twitter at @irbezek.
The post appeared first on InvestorPlace.