Tuesday, January 27, 2009

Pfizer goes soft

Pfizer's (PFE) recent acquisition of competitor Wyeth (WYE) was certainly a large one. The pharma giant paid $68B, but at the same time the maker of Viagara couldn't keep it up as their dividend went limp when they chopped it by 50%. Not quite the disappearing dividend act that many US banks, including B of A, have pulled, but size ultimately mattered as Pfizer needed the cash and just wasn't producing the earnings growth to back the payment.

I am by no means a perfect stock picker, and time will tell if I am even an adequate one, however my stock evaluation process weeded Pfizer out early. Pfizer/Wyeth could turn out to be a fabulous long term investment, however when I looked at Pfizer's merit as an investment over the last two years I stayed away basically for this reason:

Pfizer's Earnings Per Share Over The Last 4 Years
2004 EPS = $1.44
2005 EPS = $1.03
2006 EPS = $1.51
2007 EPS = $1.18
2008 EPS = $1.19

This is basically no growth in earnings over the past years. This is not good. One of the first trends that I want to see when analyzing a potential dividend investment is a trend of growing earnings with maybe a few blips. Consistency and modest growth are ideal. At the same time look how Pfizer was compensating shareholders during this time by increasing the dividend, which importantly was not backed by earnings growth.

Dividends Per Share Over The Past 4 Years
2004 = $0.68
2005 = $0.76
2006 = $0.96
2007 = $1.16
2008 = $1.28

2009's dividend pay out ratio was actually around 97% according to Globeinvestor.com. So while earnings were trying to keep their head above water, the company was raising dividends at a compounded rate of about 17%.

Whether management would have cut the dividend if not for the Wyeth purchase is beside the point. The trend was not your friend as an investor in Pfizer. While it is nice to receive an ever increasing dividend, the earnings per share trend must be in tact to back the dividend up. Failure to provide a solid earnings trend will lead to an impotent dividend.


hboy43 said...

So, raising the dividend was premature...

Anonymous said...

The Pfizer shareholders took the blue pill that made them feel good for the moment but they ignored and now suffer the adverse side effects.

Andrew said...

Pfizer and other drug companies get a little too ahead of themselves in terms of the long term sales of their drugs.

To help their stock prices, they often merge, sell components to other drug companies, etc.

Anonymous said...

I was the one who suggested to you "what I would buy if I could" a while back. Based on your Pfizer post, may I now suggest " what I researched and decided to take a pass on and why" What we do not buy is often as important as what we do buy.