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Is Pfizer’s 5% Dividend Yield a Value Trap or Underpriced Opportunity?

Pfizer stock (PFE) has tumbled over 45% from its peak of $59 per share in December 2021, leaving it trading near multi-year lows around $32. The pharmaceutical giant’s COVID-19 vaccine fueled a massive rally during the pandemic, but shares have since crashed back down as vaccine demand dried up.

Now sporting a juicy 5.08% dividend yield, Pfizer appears tempting for income investors. However, with sales slowing post-pandemic and a patent cliff looming, the stock may remain in a prolonged slump.

Fading COVID Tailwinds Weigh on Earnings

Pfizer generated tremendous profits from its COVID-19 vaccine developed with BioNTech (BNTX), booking over $36 billion in vaccine sales in 2021. However, as vaccine demand slowed in 2022, Pfizer’s earnings growth decelerated.

In Q2 2022, Pfizer reported revenue of $27.7 billion, down 6% year-over-year. Excluding contributions from its COVID-19 vaccine and therapeutic, sales declined 11%. The company earned $0.67 per share, down 47% from the same quarter last year.

Looking ahead, Pfizer expects full-year 2022 revenue of $98 billion to $102 billion, implying a 13% to 16% decline from 2021. Earnings per share are forecast between $6.30 and $6.45, down 21% at the midpoint [1].

Without its former COVID-19 tailwinds, Pfizer is facing headwinds from increased generic competition and pricing pressures. This challenging outlook has weighed heavily on the stock.

Looming Patent Expirations Add Uncertainty

Another major overhang for Pfizer is an impending patent cliff that could pressure earnings further. The company faces losses of exclusivity for several key drugs through 2025, including blood thinner Eliquis, pneumonia vaccine Prevnar 13, arthritis treatment Xeljanz, and cancer drug Ibrance [2].

Eliquis, Pfizer’s top seller, accounted for nearly 25% of 2021 sales. It begins facing generics in 2026. Meanwhile, Prevnar 13 and Xeljanz lose protection in 2025 and Ibrance in 2028.

In total, Pfizer drugs facing looming patent expirations generated over $26 billion in 2021 sales. As these brands are exposed to cheaper competition, it will create a sizable hole in Pfizer’s revenue [3].

M&A Strategy Aims to Offset Pressures

To counterbalance these headwinds, Pfizer has embarked on an ambitious M&A strategy. The company has deployed its strong COVID-19 cash flows to acquire new growth assets and drug pipelines.

Most notably, Pfizer announced a $11.6 billion acquisition of Biohaven Pharmaceuticals in May 2022, gaining its migraine drug Nurtec ODT. Pfizer also agreed to acquire cancer drug maker Seagen for $40 billion in cash in August 2022, adding antibody-drug conjugates that target tumors [4].

Several smaller deals have expanded Pfizer’s portfolio further. CEO Albert Bourla stated these deals will contribute over $25 billion in sales by 2030 while lessening the impact of upcoming patent expirations [5].

Mixed Views on Current Valuation

Given its steep sell-off and discounted valuation metrics, Pfizer may appear poised for a rebound. The stock trades at just 8 times earnings and sports a 5% dividend yield, unusually cheap for a Big Pharma name [6].

However, analysts remain cautious on the stock’s outlook. Of 14 covering analysts polled by CNN Business, 2 rate PFE a Strong Buy, 8 a Hold, and 4 a Sell. They expect Pfizer’s earnings to decline 15% in 2022 and see muted 2% growth in 2023 [7].

Until Pfizer demonstrates its acquisition strategy is delivering fruitful growth, the stock may continue languishing near multi-year lows. While the valuation seems cheap for a Dividend Aristocrat, the patent cliff introduces considerable uncertainty.

New Drug Launches Could Provide Catalyst

While Pfizer faces headwinds, its robust drug pipeline offers upside potential. The company plans to launch 19 new drugs through 2025, including 9 key product launches over the next 18 months [8].

One important near-term catalyst is Pfizer’s pentavalent meningococcal vaccine candidate, which received priority review from the FDA in June 2022. If approved as expected in October 2023, analysts estimate it could generate over $600 million in 2023 sales [9].

Pfizer also hopes to make inroads with its oral COVID-19 treatment Paxlovid, which delivered $8.1 billion in sales in the first half of 2022 [10]. Increased usage against new COVID variants could boost further uptake.

Bottom Line: Tread Cautiously Around Turnaround Attempt

In summary, Pfizer faces a challenging outlook with growth slowing post-pandemic and its top-selling drugs going off-patent soon. Its acquisitions may offset some weakness, but likely not completely. Investors should wait for stronger fundamentals before jumping into Pfizer stock.

The high dividend yield is attractive, but it could be at risk if earnings continue deteriorating. While Pfizer appears cheap based on P/E, it seems likely to be valued as a value stock until management executes a successful turnaround.