Although the COVID-19 pandemic is not over for good, the work of big pharmaceutical companies to bring vaccines and treatments to market has restored confidence in most parts of the world. For the first time since the beginning of 2020, life has returned to a more normal routine in recent months.
Much of that gratitude for the return to normal is due to the pharma giant Pfizer (PFE -0.47%). Together with his German partner BioNTechIn December 2020, the New York-based company brought the first COVID vaccine to the US market, dubbed Comirnaty. And Pfizer also launched the antiviral COVID-19 treatment called Paxlovid earlier this year.
But with all the success over the past two years, the important question is: Is the pharma stock a buy for income investors right now? Let’s dive into Pfizer’s fundamentals and valuation to see if we can answer that question.
Clearing a near-impossible bar in the quarter
Since its founding in 1849, Pfizer has grown into a giant company. In fact, it’s the fourth largest pharmaceutical company in the world with a market cap of $276 billion.
Unsurprisingly, with such a massive five-product deal, Pfizer’s product portfolio is on track to become mega-blockbusters (at least $5 billion in sales) in 2022. These include the aforementioned Comirnaty and Paxlovid, the blood thinner brand co-owned with Bristol Myers Squibb known as Eliquis, the pneumococcal pneumonia vaccine franchise called Prevnar, and the cancer drug called Ibrance.
And as if that weren’t enough, Pfizer also has four drugs on track to generate at least $1 billion in sales this year. These include drugs for rare heart diseases called Vyndaqel/Vyndamax, immunology drug called Xeljanz, and cancer drugs called Xtandi and Inlyta.
Earlier this month, Pfizer announced its financial results for the third quarter ended September 30th. The company reported total revenue of $22.6 billion for the quarter, down 5.8% from the prior-year period. But excluding the fact that the strong U.S. dollar weighed on sales, operationally, sales declined just 2% for the quarter.
At first glance, a drop in sales isn’t exactly good news. Given that demand for Comirnaty has fallen sharply over the past year as most individuals have been vaccinated, this is arguably a decent result.
Comirnaty’s revenue on an operational basis fell 65% year over year to $4.4 billion for the quarter. However, that was largely offset by the addition of $7.5 billion in new revenue from Paxlovid. As healthcare professionals continue to rely on Paxlovid to prevent severe cases of COVID-19 in at-risk patients, revenue for the product should remain exceptional over the next few quarters. And outside of COVID-19 products, revenue grew 2% operationally for the quarter.
Pfizer’s (adjusted) non-GAAP diluted earnings per share (EPS) rose 40% year over year to $1.78 in the third quarter. The company’s non-GAAP net margin increased 1,460 basis points to 44.9% for the quarter compared to the prior-year period, thanks to improved operating efficiencies. This, coupled with a 0.1% reduction in the number of shares outstanding from share buybacks, explains how the company’s adjusted diluted earnings per share skyrocketed while its revenue base was relatively flat during the quarter.
The dividend has room to grow
Pfizer’s dividend yield is well above the 3.3% S&P500 Index return of 1.6%. And the company’s dividend should be able to be higher in the years to come.
Supporting this argument is the fact that Pfizer’s dividend payout ratio will be a little less than 25% in 2022. Naturally, this provides the company with sufficient capital to further strengthen its product pipeline with more than 100 projects in clinical development.
Thanks to its low payout ratio, Pfizer can also withstand a temporary drop in its earnings as it tries to launch enough projects to make up for the drop in Comirnaty sales.
A world-class company at a deep discount
With Pfizer’s management expecting to grow its annual revenue base to $25 billion by 2030 through acquisitions and product launches, the company’s future looks bright. But Mr. Market doesn’t currently see what could be a buying opportunity.
Pfizer’s forward price-to-earnings (P/E) ratio of 9.8 is well below the drugmaker industry’s average forward P/E of 12.2. That valuation builds a margin of safety into the stock if management ultimately misses its revenue growth guidance, making Pfizer a buy for income investors.
Kody Kester has positions at AbbVie, Bristol Myers Squibb and Pfizer. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.