Its cheap valuation, strong growth prospects, and massive dividend make it ripe for outsize investment returns.
Pharmaceutical giant Pfizer (PFE 0.07%) has long been a player in the healthcare industry, but it’s currently experiencing a bit of a hangover. Pfizer’s business rapidly expanded during the COVID-19 pandemic, thanks to a temporary growth spurt from selling Comirnaty (its COVID-19 vaccine) and Paxlovid (its antiviral therapy for COVID-19).
But those sales have fallen dramatically as pandemic pressures eased, making it look like Pfizer’s business is imploding. That’s far from the truth, however. The reality is that Pfizer is resetting, and the company seems poised to embark on a new growth phase that will make the stock a compelling buy today for two primary reasons.
I’ll list them below and explain why Pfizer is the best pharmaceutical stock you can park $1,000 into today.
Previewing the new-look Pfizer
As I said, Pfizer has been around for a long time. Maybe the most impressive thing about the company is its ability to remake itself. The company’s history features multiple blockbuster mergers that have occasionally remade the company in a new light. Now, Pfizer is doing it again. The company used a large chunk of its COVID-19 profits to fund a $43 billion merger with Seagen, a company specializing in oncology treatments.
Pfizer is leaning into the oncology field as its core growth driver for the next five years:
Image source: Pfizer.
Pfizer was already headed in this direction. Pfizer’s oncology sales grew at an annualized rate of 19% from 2014 to 2023, nearly double the industry’s average. Perhaps this would get more attention if it weren’t for the pandemic. Management estimates that roughly 65% of its revenue in 2030 will come from upcoming pipeline products, a mix of new releases, and approvals for new indications (new applications for existing drugs).
There is always the risk of things not working out as intended, especially in pharmaceuticals, where the rigorous approval process could unexpectedly strike down promising drugs. However, it helps to see the company’s direction now that the COVID-19 pandemic has abated.
Buy the stock for its massive dividend…
One of the things I like most about Pfizer stock today is that the company is paying shareholders handsomely for their patience as they wait for its oncology segment to take over. Pfizer pays a strong dividend, and management has increased it for 14 consecutive years. At today’s share price, Pfizer is giving investors a whopping 5.75% dividend yield, higher than virtually any point in the company’s history outside of the financial crisis in 2008-2009:
PFE Dividend Yield data by YCharts
High yields can signal trouble ahead, but it doesn’t seem to be the case here. Pfizer’s total dividend payout for the year is $1.68, just over 60% of what analysts estimate Pfizer will earn in 2024. In Pfizer’s Q2 earnings call, management also emphasized its commitment to maintaining and raising the dividend over time.
…and for solid growth at a great price
Additionally, analysts seem optimistic about Pfizer’s direction. Depending on where you look, analysts believe Pfizer will grow earnings by anywhere between 9% and almost 11% annually over the next three to five years — when the company’s oncology plans are supposed to really gain traction.
Right now, the stock trades at just 11 times 2024 earnings estimates. That seems unnecessarily cheap for a company with a realistic shot at sustained double-digit growth. The stock’s PEG ratio is between 1 and 1.2, depending on how conservative you are on the growth rate, indicating that Pfizer is a bargain for its anticipated growth. Plus, I would argue that most stocks with this much growth don’t offer another 5% to 6% in dividend yield as a bonus.
Pharmaceutical stocks are always risky due to the nature of the drug development process, but it seems clear that investors are being compensated more than fairly for those risks today. Pfizer only needs to deliver up to analyst estimates for investors to enjoy as much as 15% annualized returns, which doesn’t include any potential movement in the stock’s valuation.
The compelling risk-reward dynamic here jumps off the page and should have investors taking note of Pfizer stock today.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.