Buying More Pfizer - Good Dividend and Good Fundamentals

Written by The Dividend Guy on May 30, 2006

I have placed a buy order through my CSA account. This will add to my existing position in the company. In addition, I am planning on placing a buy order for a couple more stocks and will report on those shortly. I would like to present my rationale for buying Pfizer.

Revenue:

Compound growth rate for revenue for the period 1995 - 2005 = 20.6%
Compound growth rate for revenue for the period 2003 - 2005 = 6.5%

The decline in the growth rate is a bit of a concern, but I believe, based on my research, that the company has some good products in the pipe. This quote from Value Line assisted with my opinion on this, “Pfizer is poised to introduce six new medicines in 2006, including three — Sutent (cancer), Champix (smoking cessation), and Exubera
(inhaled insulin) — that have billion dollar plus potential.”

Based on various growth rates through various time periods, I have estimated the revenue growth rate to 2010 to be 5% - which would put revenue at $65,471 million.

EPS:

Compound growth rate for revenue for the period 1995 - 2005 = 15.4%
Compound growth rate for revenue for the period 2003 - 2005 = 36.7%

EPS growth has been relatively stable, but has dropped off a bit in the last year or so, due to expired exclusivity on drugs. However, the most recent quarterly results have shown a 15.2% increase.

In terms of estimates, MSN presents the EPS growth rate to be 5.1%, Morningstar estimates it to be 7.2%, and Value Line estimates it to be 6%. These estimates are out to 2010. To be conservative, I went with the average of the three and estimated the growth rate at 6.2%. This provided me with an estimated EPS in 2010 of $2.29 per share.

Price:

When I refer to price here, I am referring to the historical P/E ratio to see where the current P/E ratio fits and to estimate a future P/E ratio.

The overall average P/E ratio going back to 1996 is 31.9. However, there are some really high years in there so I do not think that is a safe bet going forward. Doing some additional research, I saw that the various estimates for go forward P/E ratios are as follows: MSN estimate = 12.2, Morningstar estimate = 12.2. Value Line estimate = 18. I decided to estimate the future P/E to be 18 as that more closely fits the trend since 1996 and the other two seem to be out of whack. Keep in mind this is my projected upside P/E so I am trying to figure a bit of a best case scenario with the P/E estimate.

Return:

When I look at return, the software package that I use provides me with an estimated upside rate of return, based on my previous inputs. It is also where I am able to see the dividend trend. In the case of Pfizer, they have increased their dividend 16.9% since 1996 - really good. With an estimated 3.7% dividend yield if I purchase now, my projected rate of return is 15%. Considering that I strive for a minimum of 12 % this is pretty good.

Risk:

Risk/Reward is very important. Again, based on my software package I am able to get an estimate for the risk /reward trade off. Using a potential decline of 30% in the price of the stock, I can hope for a $2.50 of reward for every $1.00 of risk. Anything above $3 is wicked, anything above $2 is good.

Based on all the above estimates, I am able to get a potential buy range of anywhere from $16.15 to $24.75. This range comes from my estimated EPS growth, P/E, and dividend yield. Today’s price of $23.58 is within this range.

There you have it - my rationale for adding to my position in Pfizer. Who knows if I am right, but I am confident based on my research that the prospects are good and the current price makes this stock attractive.

NOTE: THIS IS NOT A RECOMMENDATION TO BUY. DO YOUR OWN RESEARCH. THESE ARE MY OPINIONS AND SHOULD NOT BE CONSTRUUDE AS INVESTMENT ADVISE.


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3 Comments so far

  1. The Dividend Guy Blog » Blog Archive » New Dividend Paying Position - Wal-Mart June 10, 2006 8:13 am

    […] If you remember when I discussed Pfizer, I look at price in terms of the historical P/E ratio compared to the current P/E ratio in order to estimate a future P/E ratio. […]

  2. exsmoker September 26, 2007 3:17 am

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  3. exsmoker September 30, 2007 11:49 pm

    Hello All,

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    If someone is interested in this topic just go to; http://endthehabitnow.blogspot.com and let me know what you think. Your honest feedback would be greatly appreciated.
    Thanks in advance.

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