Pfizer Stock Is All Grown Up
Apr 29th 2013 6:33PM
Updated May 29th 2013 11:10AM
Pfizer stock surpassed $30 per share earlier this month. I remember when it was just a teenager.
It wasn't that long ago.
For most of 2011, Pfizer stock traded for less than $20 per share. Since then, it's up 40%, more than doubling the Dow. That's downright amazing for a large drugmaker with a market cap of nearly $204 billion.
Let's take a look at a few reasons for the increase.
It's a drugmaker
Or put another way, rising tides lift all boats.
Lately, investors have been willing to take on risk. Pfizer isn't as risky as a biotech -- the Nasdaq biotech index is up more than 70% since the beginning of 2012 -- but it still has some of the risks inherent with drug development.
Someone that was really good at timing the market -- do they exist? -- could make a bundle jumping into the biotech sector when the overall stock market was doing well and jump out when it was on the decline.
Pfizer stock offers something a little in between. It's not going to go on a massive run when things are hot, but it's a little recession-resistant and offers a cushion when the overall market heads south.
All things being equal, a rising dividend should increase a share's stock price. If investors are happy with a certain dividend yield and the dividend goes up, investors should be willing to pay more for Pfizer shares to account for the higher dividend, thus bringing the dividend yield back down to the same level.
Since Pfizer cut its dividend after acquiring Wyeth, it's raised it four times from $0.64 annually to $0.96 annually. In addition to the sheer magnitude of the increase, multiple bumps of the dividend give investors confidence that Pfizer can continue the trend.
Even if Pfizer's shares don't increase, investors are getting paid more than 3% to hold Pfizer stock. That's considerably better than you could get in the bank, although owning shares is obviously riskier.
Perhaps the biggest input to Pfizer's run has nothing to do with what it's done or how the sector has performed, but how investors reacted in the lead up to the loss of exclusivity on Pfizer's top drug, Lipitor.
Investors could see Lipitor's patent expiration coming from miles away. Pfizer was in free fall from 2004 through 2009, culminating with the purchase of Wyeth. Investors were highly disappointed in how the pharma was spending its stockpile of cash. It's not like large acquisitions have been all that successful for Pfizer.
Investors were highly pessimistic about post-Lipitor Pfizer, but while revenue was down 10% from 2011 to 2012, adjusted earnings slipped just 4%.
It could have been a lot worse.
Good buy now?
Pfizer has guided for adjusted earnings per share between $2.20 and $2.30. At the midpoint, that's a P/E around 13, certainly not drop-dead cheap. The future of Pfizer stock will have a lot less to do with the industry, the dividend, or another correction, and more to do with upcoming and recently launched drugs.
Pfizer's blood thinner, Eliquis, was approved late last year. The drug, which Pfizer sells with Bristol-Myers Squibb , has multibillion-dollar potential because the current offering, warfarin, is difficult to use. While doctors are clamoring for a replacement, drugmakers developed three. In addition to Eliquis, there's also Johnson & Johnson's Xarelto and Boehringer Ingelheim's Pradaxa. The blood thinner market is so large, I think there's plenty of room for all three.
That's true of rheumatoid arthritis, which has multiple blockbuster drugs serving patients. Pfizer's hoping that its oral medication, Xeljanz, can take down the current offerings, including Johnson & Johnson's Remicade, AbbVie's Humira, and Enbrel, sold by Pfizer and Amgen , which all have to be injected. It'll take awhile to capture sales from drugs that doctors are comfortable prescribing, but investors will be happy with just a fraction of the market -- Remicade topped $6 billion last year, Enbrel broke $4 billion, and Humira topped the list at $9.3 billion.
Neither Eliquis nor Xeljanz by itself will replace Lipitor. But it's a nice start to keep Pfizer stock rolling.
Another drugmaker looking to beat the patent cliff
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The article Pfizer Stock Is All Grown Up originally appeared on Fool.com.Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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