Pfizer Ready To Create Value

After a decade of disappointed investors, drug giant Pfizer (NYSE:PFE) may finally be ready to deliver the value that seems to be embedded in the company. Since the summer of 2000, shares in Pfizer have declined by over 60%. Yet over that same decade, the company's sales have more than doubled while profits have nearly doubled. Yet the past operating performance is currently in the shadow of future events. Namely, the looming patent expiration of the company's blockbuster drug, Lipitor.

Healthier Than You Think
While Lipitor's patent expiry is a significant event for Pfizer, it's likely that has already been factored into today's stock price of $17. At the current price, Pfizer shares trade for under 8 times forward earnings estimates. This P/E is at a significant discount to the industry average. Rivals such as Merck (NYSE:MRK) and Novarits (NYSE:NVS) are trading for 10 times forward earnings. While Pfizer's dividend yield of 4.3% is matched by most rivals, few if any can match the company's cash gushing balance sheet. Pfizer generates over $15 billion in operating cash flow annually, while dividend payments and capital expenditures per year are less than half of that. So even with the debt assumed to buyout Wyeth, Pfizer has plenty of excess cash.

A Changing of the Guard
That excess cash may now finally find its way to shareholders. Earlier this month, Pfizer announced that CEO Jeff Kindler was being replaced by Ian Read, a 32-year Pfizer veteran. Under Read, the hope is that the company's cash will lead to more significant share buybacks and increased dividend payouts. In 2010, Pfizer bought back just over $1 billion in shares, an incredibly modest amount based on the resources available to the company. Further, the company's annual dividend of 72 cents could easily be increased to give the company a yield above 5%. That would give Pfizer one of the highest dividend yields in the industry next to Eli Lilly (NYSE:LLY), which currently yields nearly 6%.

The Bottom Line
The loss of Lipitor is significant. But the deep pipeline that the Wyeth deal brings to Pfizer should help mitigate any significant hit from next year's patent expiration on Lipitor. But the company offers numerous levers of value creation as a result of its cash flow. There's also the lever of corporate divestitures where Pfizer could sell assets or spin-off businesses that would likely command a higher earnings multiple than that being assigned to the company as a whole. Overall, Pfizer is a company with a cheap stock price, earnings power and numerous options to reward shareholders. (These three drugs were the winners of their day. Find out what winning pharmaceuticals have in common. Check out Pharmaceutical Phenoms: America's Best-Selling Medicines.)

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