Why Pfizer Is My Largest Healthcare Position

Healthcare stocks have been out of vogue with investors since late 2022. Myriad reasons underlie the negative sentiment toward the healthcare sector, but in some instances, this dour take isn't entirely warranted. Pharmaceutical titan Pfizer (NYSE: PFE) is a case in point.

The drugmaker's shares have lost 47% of their value from their three-year high and currently trade near a historically low forward price-to-earnings ratio (P/E) of just 8.7. Here's why Pfizer is my largest healthcare position, despite its poor showing over the past few years.

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A strong foundation amid policy uncertainty

Recent political developments have injected uncertainty into the healthcare sector. Robert F. Kennedy Jr.'s confirmation as Secretary of Health and Human Services has raised questions about future healthcare policy. However, Pfizer's foundation remains solid, based on strong cash flow generated from a diverse basket of drugs.

The company's large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business. In a business where drug development needs many shots on goal to be successful, Pfizer has the financial resources and established research power to support the development of innovative new drugs.

Improving pipeline productivity

After many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer and immunology. The company's 2023 acquisition of Seagen has also significantly bolstered its oncology portfolio, contributing a noteworthy $3.4 billion in revenue for full-year 2024.

Pfizer's vast financial resources also support a leading sales force. The company's commitment to post-approval studies provides its salespeople with substantial data for their marketing campaigns. Further, leading sales forces in emerging countries position Pfizer to benefit from the dramatically increasing wealth in nations such as Brazil, India, and China.

Steady growth despite COVID-19 product declines

Pfizer faces near-term challenges as COVID-19 product sales decline. However, excluding Comirnaty and Paxlovid, revenue grew 12% operationally in full-year 2024. This result demonstrates the strength of Pfizer's core business.

With limited patent losses and fewer older drugs following the divestiture of its off-patent division Upjohn (now part of Viatris), Pfizer is poised for steady growth before a round of major patent losses hits in 2028. Even when these patent losses do come into play, the drugmaker's diverse portfolio helps insulate it from any one particular patent expiration.

Cost-cutting initiatives driving margin improvement

Pfizer has successfully delivered on its $4 billion net cost savings target from its ongoing cost realignment program and has increased its overall savings target to approximately $4.5 billion by the end of 2025. Additionally, the company remains on track to deliver $1.5 billion of net cost savings from the first phase of its "Manufacturing Optimization Program" by the end of 2027.

These efforts should expand margins over time as Pfizer's base business grows and newer products gain traction. Keeping with this theme, management has expressed confidence in their ability to return the company to pre-pandemic operating margins in the coming years, a development that would boost profitability and, hence, its ability to reward loyal shareholders.

Attractive dividend profile

Perhaps Pfizer's most compelling feature for income-focused investors is its dividend. The company currently offers a substantial 6.7% dividend yield, well above the S&P 500's (SNPINDEX: ^GSPC) modest yield of around 1.29%.

While the payout ratio of 119% might appear concerning at first glance, it's worth noting that the peer-group average among dividend-paying pharma stocks currently stands at over 120%. Elevated payout ratios are common in the pharmaceutical industry due to the cyclical nature of business and product development.

Topping it all off, Pfizer has paid 345 consecutive quarterly dividends and has increased its dividend for 16 consecutive years. This impressive track record demonstrates the company's commitment to returning value to shareholders, even through challenging business and macroeconomic cycles.

Compelling valuation for a top passive-income stock

From a valuation perspective, Pfizer looks attractive with a fair value estimate of $42 per share, according to Morningstar analyst Karen Andersen. While fair value estimates from analysts are never a solid reason to buy a stock, Andersen's take implies significant upside potential from current levels, with shares presently trading at around $25.5 a share at the time of this writing.

What's behind this bullish outlook? Pfizer's 2024 financial results were strong, with full-year revenue of $63.6 billion stemming from healthy 7% year-over-year operational growth. For 2025, Pfizer recently reaffirmed its financial guidance, including revenue in a range of $61 billion to $64 billion. Yes, that's not exactly blistering top-line growth, but the company is delivering stable, above-average income for its shareholders.

Risks to consider

Pfizer does face several risks that investors should weigh carefully. For instance, competition is increasing for two key products. Prevnar, Pfizer's blockbuster pneumococcal vaccine, faces competition from Merck's Capvaxive, while Ibrance, the company's leading breast cancer treatment, is under pressure from Novartis' Kisqali.

Moreover, COVID-19 product declines have been creating a drag on top-line growth in recent quarters, although this headwind is expected to steadily fade from view over the coming quarters. Pfizer also faces potential U.S. drug price-related policy reform.

Lastly, and perhaps most importantly, the drugmaker is grappling with a patent cliff later this decade for key products, like Ibrance and Eliquis. The latter is Pfizer's blockbuster blood thinner, co-marketed with Bristol-Myers Squibb. New drug launches ought to provide a buffer against these forthcoming revenue declines, but nothing is guaranteed in the highly competitive world of pharmaceuticals.

Why I made Pfizer my largest healthcare holding

Pfizer has earned the top spot in my healthcare portfolio for several compelling reasons. The combination of a generous 6.7% dividend yield and 16 consecutive years of dividend increases provides me with reliable income in an uncertain market environment. This consistency matters tremendously in my investment approach.

The stock's dramatic 47% decline from its three-year high has created what I believe is a significant value opportunity. With a historically depressed forward P/E ratio of 8.7, Pfizer stock offers a substantial margin of safety, compared to many other large cap U.S. stocks. The S&P 500, after all, presently trades at around 20 times forward earnings.

I'm particularly encouraged by the company's operational growth of 12% in its non-COVID business during 2024. This double-digit growth demonstrates that Pfizer's core business remains robust and growing beneath the temporary headwinds from declining pandemic-related revenue.

The wide economic moat built around Pfizer's business also gives me confidence in its long-term sustainability. Patent-protected drugs, economies of scale, and a powerful distribution network should continue to generate returns on invested capital that exceed its cost of capital.

While I acknowledge the risks -- including the elevated payout ratio, upcoming patent expirations, and policy uncertainty -- I believe these concerns are more than accounted for in the current share price. In a market with few clear-cut bargains, Pfizer stands out as an opportunity to acquire a quality business at a discount, which is why it has become my largest healthcare position.

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George Budwell has positions in Pfizer. The Motley Fool has positions in and recommends Bristol Myers Squibb, Merck, and Pfizer. The Motley Fool has a disclosure policy.