Why I'm Considering Leaning Heavily Into Pfizer

High-yield dividend stocks have long been a cornerstone of wealth-building strategies for savvy investors. Typically offering yields above 3%, these companies have consistently outperformed the S&P 500 over extended time frames when dividends are diligently reinvested. This outperformance stems from the powerful combination of accelerated compounding and the tendency for high-yield stocks to be temporarily undervalued.

Pharmaceutical-powerhouse Pfizer (NYSE: PFE) has recently emerged as an intriguing candidate in the high-yield category. The drugmaker's stock price has taken a significant hit, tumbling over 30% in the past 36 months. This substantial decline has pushed its dividend yield to an attractive 5.73% at current levels, well above its historical average of approximately 3.3%.

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A fallen pharma giant with potential

The market's pessimism toward Pfizer isn't without merit. The company faces headwinds from declining COVID-19 product sales and skepticism surrounding its recent acquisition spree. The recent voluntary withdrawal of Oxbryta, a key drug from its $5.4 billion acquisition of Global Blood Therapeutics in 2022, has only added to investor concerns.

However, seasoned pharmaceutical investors recognize the industry's cyclical nature. The industry's rhythm of drug development, regulatory hurdles, marketing pushes, and patent expirations means that today's laggard can quickly become tomorrow's leader with a single clinical success.

This backdrop sets the stage for why I'm seriously contemplating a significant increase in my Pfizer position over the coming months, with plans to hold for the long term. Let's delve into the factors that make Pfizer a compelling opportunity for long-term investors.

A high-yield dividend stock with long-term potential

Pfizer's current 5.73% dividend yield stands well above the S&P 500 average of 1.35%. The company's payout ratio of 443% appears unsustainable at first glance. However, this elevated ratio stems from temporary factors, including declining COVID-19 product sales and recent acquisitions. Historically, Pfizer has maintained a payout ratio of approximately 50%, considerably lower than the 75% threshold that can signal that a dividend is on the chopping block.

The stock's forward price-to-earnings (P/E) ratio of 9.5x 2026 projected earnings also provides a significant margin of safety. This low valuation offers upside potential if Pfizer successfully executes on its pipeline and growth initiatives, and gives investors downside protection in the event of a marketwide pullback.

Attractive valuation with pipeline potential

Pfizer has over 100 programs in clinical development, including 33 in late-stage development. New cancer medicines are one of the key bright spots for prospective shareholders.

The drugmaker is investing heavily in oncology following its $43 billion acquisition of Seagen in 2023. Management expects Seagen's anti-cancer portfolio to contribute $10 billion in risk-adjusted revenue by 2030.

The company also has promising candidates in immunology, rare diseases, and vaccines. This diverse pipeline provides multiple opportunities for future growth.

Near-term headwinds create opportunity

Pfizer faces near-term challenges as COVID-19 product sales decline. However, excluding Comirnaty and Paxlovid, revenue grew 14% operationally in Q2 2024. This result demonstrates the strength of Pfizer's core business.

The company is also cutting costs, targeting at least $4 billion in net savings by the end of 2024. Patience may be required as pipeline programs advance and COVID headwinds abate. However, for long-term investors, Pfizer's combination of high yield, low valuation, and pipeline potential is compelling.

Evolving vaccine franchise

Pfizer continues innovating in vaccines beyond COVID-19. The company recently launched Abrysvo for respiratory syncytial virus (RSV) prevention in older adults and pregnant individuals. Despite tepid demand for RSV vaccines this year due to regulatory restrictions, Wall Street still thinks Abrysvo can hit $2 billion in annual sales at its peak.

Most importantly, new vaccine products, like Abrysvo, could help offset losses from declining COVID-19 product sales. In other words, Pfizer's rapidly growing vaccine portfolio provides a reliable cash cow for the company, giving it time to develop high-value medicines in oncology, immunology, and rare diseases.

Cost-cutting to drive margin expansion

Pfizer has launched initiatives to rightsize its cost structure as COVID-19 revenue declines. Earlier this year, the drugmaker announced a manufacturing optimization program targeting $1.5 billion in savings by 2027. This cost-cutting initiative is in addition to its broader $4 billion cost-reduction plan.

These cost-reduction efforts should expand margins over time as Pfizer's base business grows and newer products gain traction. Improved profitability would also support dividend growth and potential share repurchases once the balance sheet is adequately deleveraged (more on this issue below).

Risks to consider

Pfizer faces risks that investors should consider. The company took on significant debt to fund the Seagen acquisition, evidenced by its debt-to-equity ratio of 0.78.

Successfully integrating Seagen and delivering on revenue projections will be crucial. Pfizer also faces a patent cliff later this decade for key products like the breast cancer medicine Ibrance and the blood thinner Eliquis.

The company's near-term growth outlook remains uncertain as the COVID-19 business normalizes. Pipeline setbacks could further pressure the stock. Investors should thus size positions appropriately, given these significant near-term risks.

Long-term opportunity for patient investors

For investors with multiyear time horizons, Pfizer offers an attractive opportunity. The stock's high yield and low valuation provide downside protection. Meanwhile, the company's broad late-stage pipeline creates potential upside catalysts.

As a long-term holding, Pfizer should benefit from demographic trends driving increased healthcare spending globally. The company's strong cash flow supports continued dividend growth and business reinvestment. For those willing to weather near-term volatility, Pfizer could deliver strong total returns in the years ahead.

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George Budwell has positions in Pfizer. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.