Sunday, January 22, 2017

Time to add this high quality stock to my Healthcare portfolio

Healthcare stocks have under performed last year and are further beaten down starting this year due to the continued drug price pressure and lingering Obama Care repeal.

Despite the short-term negatives, there are some excellent blue chip bargains in the sector and a good time to grow and diversify my healthcare portfolio which currently makes up only about 6% of my entire dividend stock portfolio.

You can see my complete portfolio here:My Dividend Stock Portfolio


Currently, I only own two healthcare related stocks in my portfolio. I recently added Abbvie (ABBV) to my portfolio. Abbvie is a dividend aristocrat and I have written about it here: Bought more Abbvie (ABBV) on dip today. The second Pharma company I own is Johnson & Johnson (JNJ).

Now, I am looking to add a third Pharma company to my high quality healthcare sector portfolio. My goal is to keep the healthcare sector exposure to the top two to three companies.

Pfizer (PFE) is a company that I have my eyes on for sometime and recently it has come down to a valuation level and dividend yield which makes it very attractive and hard to resist. Pfizer is the largest Pharma company and manufacturer of some of the most widely known and used drugs for treatment of numerous deceases and ailments known to mankind.

Before I dive into fundamental analysis, it's always a good idea to learn as much about the company as possible. Therefore, I would strongly encourage anyone thinking about buying Pfizer's stock to read up on company's history, products, and future growth outlook.

One can start by visiting company's website: http://www.pfizer.com/ and head over to Investors link to get company's financial and future outlook related presentations. I would especially encourage reviewing their recent Annual J.P. Morgan Healthcare Conference presentation/webcast as it covers updates and commentary from the management on recent events and their product pipeline. The transcript and webcast can be found here: http://www.pfizer.com/investors/presentations

Since I have already read up on Pfizer's investor material, I am going to mainly focus here on the fundamentals of the company's stock to determine whether it is a good buy at current price. I will start with valuation and then look into dividend strength and history.

Valuation Metrics

5-Year Peak Value P/E: 16.2 (pink line)
5-Year Fair Value P/E: 15  (orange line)
5-Year Normal P/E: 13.1 (blue line)
Current P/E: 13.1

 

PFE is currently trading at its 5-year Normal P/E valuation which is also about the lowest P/E multiple in the past three years and the lowest since coming out of last recession.

Upside Potential

Given the current price of $31.77 (as of 1/20/2017) and 12mo fair value price target of $39, there is a potential upside of 23.2% in price alone with a Total ROR over next 12mo of 27% (w/ div). This return is possible because the stock is currently trading at a large discount to its next year's estimated earnings.




Now, let's take a look at valuation based on Free-Cash-Flow (FCF).



On FCF basis, stock looks cheap with a P/FCF ratio of only 12.1. This is a discount of 27.5% from next year's FCF estimate of $2.70/sh.

Based on both Price-to-Earnings and Price-to-FCF basis, stock looks cheap and this looks like a good entry point.

Dividends 

Dividend Yield: 4.0% (highest in last 5 years)
5-Year Dividend Growth (CAGR): 9.2%

Earnings Payout Ratio (TTM):  Net income/ Div Payed = 6,211/12,759 = 48%
FCF Payout Ratio (TTM):  7,225/12,759 = 56%

Dividend is well covered by both earnings and free-cash-flow.

Note: TTM stands for Trailing Twelve Months, this is the closest to real-time data one can get based on the most recent financial report.

I like to buy a stock when it is yielding near or above its 5-year yield. Pfizer is currently paying a yield of 4% which is the highest it has paid in the past five years.


Historically, company has maintained a payout ratio around or below 50%. Pfizer did cut dividend in 2009, but it was cut not because dividend wasn't covered but rather because company needed extra cash to finance a strategic deal to acquire drug maker Wyeth for $68 billion. This deal gave Pfizer a leadership position in bio-therapeutics and vaccines.

If there is one reason to justify dividend cut, it would have to be for strengthening company's business and growth.

Despite of the 2009 dividend cut, Pfizer has a multi decade history of paying and raising dividends and enjoys the status of Dividend Challenger on the Dividend Champion list. A Dividend Challenger is a company that has paid and grown dividends for at least 5-years consecutively. Pfizer has raised its dividend for last seven consecutive years.

Past Performance

5 - Year Annualized ROR (w/o Div): 10.3% vs. S&P 500: 10.2%
5 - Year Annualized ROR (w/ Div): 13.4% vs. S&P 500 11.6%


Forward Forecast

Looking longer term and based on the F.A.S.T Graphs forecast, there is a potential for 15% annual return over the next three years based on a fair value P/E multiple of 15.


Debt Level

Company has a low level of debut with a Debt/Cap ratio of 28% and a S&P Credit Rating of 'AA' which is only two notches below the top rating of 'AAA'. Just so you know, only two companies in the entire S&P have a credit rating of 'AAA'. Can you guess which ones?

Conclusions 

Based on both past and future valuations and current and past dividend yields, Pfizer's stock looks cheap and very attractive as a long-term buy. The company has a very strong financial position as well as good dividend growth history.

I will start by adding a 1/4 position now and later will add shares on further dips. Company is expected to report its fourth quarter and full-year earnings report on 01/31/2017.

Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Full disclaimer can be read here: Full Disclaimer

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