Is Pfizer the Best Dividend Stock in Healthcare?

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Pfizer Inc.'s (NYSE: PFE) sales have fallen sharply since its top-selling Lipitor lost patent protection back in 2012. However, steps management has taken to control costs and invest in cancer drugs and biosimilar drug development may position it perfectly for future growth.

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In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss Pfizer's strategy and if its stock is a buy.

A full transcript follows the video.

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This video was recorded on Oct. 4, 2017.

Kristine Harjes: Our third and final company that we want to highlight today is not a Dividend Aristocrat because they cut their dividend during the financial crisis. This one is Pfizer, which yields just under 4%.

Todd Campbell: I put Pfizer in the middle of these three as far as the risk spectrum goes. Pfizer has been dealing for years with the overhang of sliding sales tied to the patent expiration on what was once the best-selling drug in the world, Lipitor, which you and listeners may know as being the most widely used statin for lowering bad cholesterol.

That was a $14 billion-a-year drug at one point. And obviously, losing patent protection on it created a very big headwind to try and overcome for this company. It appears that they may be finally turning the corner now, and if so, getting back to growth. And if they're getting back to growth, and cash flow trends up because of all the restructuring and all the costs that they x-ed out of their system over the last seven years, then that dividend could expand.

Harjes: Yeah. Pfizer was the poster child for the patent cliff when a ton of its drugs lost their patent protection and had their sales eaten away by generic competition. Lipitor lost its patent in 2011. When I mentioned that Pfizer had to cut its dividend during the financial crisis, this was largely due to a ginormous $68 billion acquisition of Wyeth at a time when capital was kind of hard to come by. So, they had to cut their dividend. And it's actually taken until early this year to get back to the pre-Wyeth acquisition payout levels. But it's something that they kind of had to do back then. They were facing 14 total patent expirations through 2014. That was going to be $35 billion in lost revenue. So, this company had to buy growth. They also had to have organic growth. And they're finally starting to get back on their feet. I think they look pretty strong right now.

Campbell: It was the right move. I really do think it was the right move. I mean, you have famous investors like Buffett who have come out in the past and said, I don't necessarily really like dividend stocks, I'd rather have companies that can reinvest in themselves and get bigger that way instead. I think Pfizer had to make a decision, had to make the decision of, do I try and find the money somewhere in the budget to pay this dividend, or do I reallocate that money to R&D and acquisitions. As a result, it's on very stable financial ground now. It has one of the best balance sheets out there in pharmaceuticals. It was only a couple of years ago that they were proposing a $160 billion merger and acquisition.

Harjes: Which is insane!

Campbell: Yeah. So, they have a tremendous amount of financial flexibility.

Harjes: And they don't have $160 billion in cash. I will point that out. They have $14 billion. But still, if they were to make that, if they had been able to make that Allergan acquisition when they were looking at it, low-interest debt is so much easier to come by now. So, yes, they do have more firepower.

Campbell: Yeah, financial flexibility is the key. They're leaner and meaner than they were before. Sales could come in between $52 billion and $54 billion this year. If so, that's a start in the right direction upward from where they were last year. Earnings are growing more quickly than revenue because of all that cost cutting they did. And the yield is fine, and the payout ratios are fine. I think this is a company that is worth taking a little bit of risk on. We haven't even dived into the potential for things like their biosimilars pipeline, which they bought when they acquired Hospira, or the potential to continue to expand in cancer, which they've done through buying Medivation more recently.

Harjes: Yeah, they have 32 different late-stage clinical programs. I know that nine of them are for one single drug in different cancers. Another four of the 32 are for biosimilars. So, all these different areas that you've mentioned are places where they're not just dabbling but they're pushing pretty hard, and they have late-stage candidates that will hopefully hit the market very soon and continue to drive growth.

Campbell: Time will tell. Listen, income investors have to look at stocks the same way that I think regular investors do, which is that you have to consider the business first. If you look at all three of these names, look at the business first. Do you believe that the business is in a position to continue to kick off increasingly more cash flow? If you believe that, then it's worth investing in it, because more cash flow will mean bigger dividend payouts. If you don't believe that, then don't invest in these stocks.

Harjes: Yeah, no matter what the dividend yield is.

Campbell: Correct. I think that many investors who are new to income investing chase the yield. They say, "This is a high dividend yielding stock, I have to buy it," forgetting that the business itself is more important than the yield.

Harjes: Yeah, absolutely. It takes a little bit more time to do that research, but that's why you have us, hopefully helping you out on this show, and all of the great articles written by Todd Campbell and the like on fool.com.

Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.