- Fundamentals remain strong with Pfizer. Ibrance & Xeljanz are growing substantially. Xtandi will add more fuel to the fire.
- Fundamentals in big-pharma are still bullish which is why I believe Pfizer's drugs will continue to see strong demand.
- Since Pfizer trades in a range, selling option premium every month is a favorable strategy to bring in extra income .
Pfizer Inc. (NYSE:PFE) investors will be apprehensive of the most recent Medivation acquisition for $14 billion. Why? Well, in 2009, Pfizer acquired Wyeth for $68 billion which resulted in thousands of lost jobs and a cut in the dividend. Now dividend growth rates are almost back to 10% over a 5 year period but with a trailing twelve-month (TTM) payout ratio of 102%, dividend investors won't be resting on the past laurels. Pfizer currently yields 3.45% and, remarkably, the stock is up only 7.3% since the turn of the century.
I believe Pfizer stock can be an excellent trading vehicle for income investors due to its fundamentals, its liquidity and the range-bound manner of its share price. Many investors believe that stocks must go up meaningfully for them to be good investments.
I disagree, especially from the standpoint of not knowing when to sell. In fact, from an income or dividend standpoint, stocks which trade in a range and also increase their dividends annually are far better candidates for income compared to other types of stocks. Why? Because it is all about Share count or accumulation of shares - something Warren Buffet has concentrated on for decades. Let's go through Pfizer's fundamentals, why I think it is an excellent dividend and income candidate and how one could boost their quarterly or annual income going forward.
Source: Google Finance
Ibrance, Xeljanz and now Xtandi Will Lead The Company's Growth
In terms of the company's fundamentals, there are few to match it in this sector. Its patents, economies of scale and strong balance sheet give this company distinct competitive advantages. The stock is still actually down 5% since second quarter results were announced but this may present a good buying opportunity. Pfizer's "Prevnar" line of vaccines didn't perform in the second quarter which was the reason for the pullback in the share price. Coming in $320 million below estimates was huge considering that this product line is the biggest earner for the company. However, with Ibrance, Xeljanz and now Xtandi which will really give the company a presence in oncolgy, Pfizer is now in a position where it can better leverage its cancer drugs (which is a booming industry), going forward. The growth rates of some of the newcomers have been stunning which, in one way, is required. Why? Well, around $800 million is required in development costs to develop a single drug. Pfizer needs its patent drugs to supply the needed cash flow for the wheel to keep turning.
Prevnar Will Bounce Back Due To Stronger Demand From Europe And Prevnar 13 Growth
Prevnar sales should bounce back in the third quarter due to the recent FDA approval which means that age threshold has been expanded to include people from 18 year of age right up to 49 years olds. This brings more patients into the picture which should increase demand for the vaccines going forward. The key, though, will be in ensuring that Pfizer's innovative set of drugs outgrow the declines we will invariably see on the generic side of its business. The company's Hospira acquisition last year was designed to shore up the company's generic wing and I still believe that synergies will come here considering it is still less than 12 months since the acquisition has gone through.
Fundamentals Look Very Strong In Big Pharma
As we can see from the chart below, the volume in the triple leveraged ETF Direxion Daily S&P Biotech Bull 3X ETF (NYSEARCA:LABU) has really increased this year. Volume spikes in leveraged ETF's usually mean turning points which is why I believe we are getting one, presently, in biotech. As the trend line shows, we now have strong resistance at the 38 level in this ETF. Thus far this ETF has held above this support level.
Selling Covered Calls Every Month Is Almost Guaranteed Income
Stocks like Pfizer are suitable stocks for selling option premium because they trade in a range. My recommendation would be to sell out of the money covered calls every month and invest your profits back into the stock like you would do with the quarterly dividends. Here is the difference the extra covered call income would make over the long term.
If $50k was invested at the start of this century, it would have only turned into $64k this August in 2016 if simply all quarterly dividends were reinvested. This would give the dividend investor an annual income of $2,214 in 2016 if we use the present yield of 3.46% as the annual yield. However, if $100 was invested every month since 1/1/2001 back into the stock (through income from covered calls), the initial $50k would now have become $102k which is a staggering difference. Remember the stock is only up 7% over the past 15 years! However, by adopting this strategy, dividend income would have gone from around $550 a year in 2001 to over $3,800 a year in 2016 ( a 7 fold increase). The best way to sum this up is with a table which illustrates that range bound stocks can still produce healthy returns over a long enough time span.
|Income Investment Strategy Since 01/01/2001 On A $50k Investment||Annual Income (Approximate in 2016)||Portfolio balance (August 206)|
|Dividends Only Every Quarter||$2,214||$64,007|
|Dividends + $100 Monthly From Covered Call Income||$3,513||$101,632|
To sum up, Pfizer stock holds all the aces if an investor wants a good income-paying stock. The stock is liquid, has sound fundamentals and most importantly trades in a range. My recommendation would be to sell covered calls every month and use those profits to buy more shares. I don't think the dividend is at risk despite the current high payout ratio. The company's debt to equity ratio is under 0.5 which means this company still has ample room to borrow if it needed to.