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By Damien Conover, CFA | 05-30-2017 11:00 AM

Undervalued Pfizer Offers Great Dividend Opportunity

Morningstar's Damien Conover expects steady growth for the wide-moat firm, which will likely lead to steady growth for the dividend.

Securities mentioned in this video
PFE Pfizer Inc

Damien Conover: When thinking about dividends, Pfizer offers a great opportunity for investors. We think the stock is undervalued and pays a very strong dividend. Right now, the dividend yield is close to 4%. That dividend is really supported by a strong portfolio of drugs--a lot of new drugs coming into the portfolio and really not too many patent losses in the near term. So, we're anticipating relatively steady growth for the firm, and that will likely transfer into steady growth for the dividend.

When we think about its peer group, most of the large-cap pharmaceutical stocks pay out about 50% of their earnings in a dividend. Pfizer is right there with that group, and we think that will likely stay the case for the next several years. So, as earnings continue to grow, we think the dividend will grow modestly as well.

Thinking about historically, Pfizer's dividend has been very secure; however, when they did buy Wyeth back several years ago, they did cut the dividend. Now, we think that was largely due to a lot of the cash that they needed to fund that acquisition. Going forward, we expect Pfizer to make an acquisition of a larger size, but we don't anticipate a dividend cut. Now, a lot of the reasons for that is the balance sheet is very secure and the earnings are relatively stable.

So, when we think about the context of not only strong dividend, but from a valuation perspective, we think the stock is undervalued as well. So, we are looking at a firm that has a good total return for investors. On top of that, this is a firm that we see as having a wide economic moat, supported by a lot of drugs, both currently marketed as well as next-generation molecules out there for Pfizer.

When we think about risks to the overall equation, sometimes drug pricing pressure comes up. We believe that Pfizer's drug portfolio is well-positioned for that. A lot of complex molecules, molecules serving the more specialty-oriented group. That group tends to have stronger pricing power, and we think that will not only support earnings growth but also a secure dividend for the near and long term.

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