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Get A Best-In-Class Dividend And 30% Upside From This Pharma Stock

Friday, February 14, 2014 10:00 AM

With medicine being the huge industry it is, pharma companies bring in billions of dollars with blockbuster drugs -- and they are great at using this cash to reward shareholders.

When deciding which Big Pharma company to invest in, there might be no better choice than the company that bills itself as the world's largest research-based pharmaceutical company -- the same company that brought us Lipitor, Celebrex and Viagra.

Since 2004, Pfizer (NYSE: PFE) has paid out the most cash to shareholders (as a percentage of enterprise value) of any of the major drugmakers. Pfizer's cash payout clocks in at 61%, compared with GlaxoSmithKline (NYSE: GSK) at 46%, Merck (NYSE: MRK) at 39%, Eli Lilly (NYSE: LLY) at 36% and Johnson & Johnson (NYSE: JNJ) at 32%.

There's nothing to suggest this trend won't continue into the future. Pfizer has been getting more focused on the higher-growth drug business. Back in 2012, Pfizer divested its nutrition business, selling it to Nestle (OTC: NSERGY), and in mid-2013 it spun off its animal health business. As a result, it's turning its attention to the higher growth drug areas.

These include oncology, cardiology, neuroscience and immunology. The oncology segment was Pfizer's fastest-growing segment last quarter, with revenue up 29% year over year. Not only are oncology and immunology high-growth areas, but they are also areas in which Pfizer is positioned to become the market share leader.

Wyeth, which Pfizer acquired in 2009, had complimentary products in these areas and has given Pfizer a much greater presence in emerging markets. Pfizer's revenue from emerging markets grew 9% last quarter from the same period the previous year.

Flickr/Kojach
When deciding which Big Pharma company to invest in, there might be no better choice than the company that bills itself as the world's largest research-based pharmaceutical company.

Pfizer's Lyrica drug, the first approved to treat fibromyalgia, is one of its most promising drugs. Pfizer introduced Lyrica in 2004, but label expansions continue to lead to new growth avenues for the drug -- including the treatment of fibromyalgia, which afflicts more than 5 million Americans. Lyrica is also used to treat diabetes and shingles pain. Lyrica is protected from genericization in the U.S. until 2018.

One of the keys for any drug company is its pipeline, which includes new drugs that it plans to bring to market. One of Pfizer's most promising pipeline products is dacomitinib, which is in Phase III studies for non-small-cell lung cancer. Another drug in Pfizer's pipeline, Xeljanz, recently received FDA approval for the second-line treatment of rheumatoid arthritis. Pfizer also has Xeljanz in Phase III studies for psoriasis and active psoriatic arthritis.

Yet another promising drug in Pfizer's pipeline is Palbociclib, which just delivered significant improvement in treating breast cancer in a Phase II trial. Pfizer is now likely to seek accelerated approval from the FDA, which would allow it bring the drug to market more quickly.

Pfizer is also a "Total Yield" play, rewarding shareholders nicely with buybacks and dividends. In recent months, we here at StreetAuthority have broadened our measure of corporate generosity to focus not just on buybacks but also dividends and debt reductions. These three pillars form what we call our Total Yield strategy, and we're always on the prowl for companies that combine these ways of rewarding shareholders.

Pfizer's forward dividend yield is in line with major peers at 3.3%, but its payout ratio is only 30%. That suggests the company could easily boost its dividend without putting a strain on the company's cash flow. During the fourth quarter, Pfizer bought back $4.6 billion in stock, putting the 2013 total repurchases to $16.3 billion.

Risks to Consider: Pfizer has already lost patent exclusivity on a number of its key products, including Lipitor and Zoloft. A couple of other products will face greater generic competition in the next few years, namely Viagra. New products are the key for Pfizer's growth, so any slowdown in its ability to bring products to market will hamper its revenue growth.

Action to Take --> Buy Pfizer with for a price target to $41. Over 30% upside. Using a price-to-earnings multiple of 18, which is Pfizer's five-year average, on 2014 earnings per share of $2.28, suggests a $41 price target. You'll also get a 3.3% dividend yield.

P.S. We're so excited about Total Yield that we're devoting an entire newsletter to it. And right now, we're giving readers an exclusive glimpse at some of the top stocks we've uncovered using this method -- including one that's gained an astonishing 247% over the past year. To get the name of this stock -- as well as 11 others that are currently posting "total yields" as high as 27.7% -- and view our free research, follow this link.

Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.