Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Pfizer Is Quietly Becoming an Income Play
Transcript
- Lucas: Pfizer is yielding almost six percent right now. That's not a typo—five point nine percent as of this week's close. Luna: Wait, the same Pfizer that lost something like forty percent of its revenue when COVID vaccine demand collapsed? Lucas: Exactly the same one. And look, I get the instinct to write it off. The stock went from a peak near sixty dollars in late 2021 to the mid-twenties today. It's been a brutal unwind. But what's interesting is what's happening under the hood now. Luna: So the dividend is safe? That's the first question anyone should ask with a yield that high. Lucas: It's a fair question. The payout ratio based on this year's expected earnings per share is around seventy-five percent. That's not super comfortable, but it's not screaming distress either. What matters more is free cash flow. And there, Pfizer is generating roughly eight billion dollars in free cash flow this year, against dividend obligations of about seven point five billion. So the dividend is covered—just barely, but covered. Luna: Right, but isn't the concern that the pipeline hasn't replaced the COVID revenue? That's the bear case. Lucas: It is. And to be fair, the COVID products—Comirnaty and Paxlovid—still accounted for about fifteen billion in revenue last year. That's down from over fifty billion at the peak, but it's not zero. The market seems to be pricing in that those revenues go to zero, which might be too pessimistic. But the real story is the non covid pipeline. Luna: I know they've been pushing into oncology. They bought Seagen for forty-three billion dollars, right? Lucas: Yeah, that deal closed in late 2023. Seagen gives them a portfolio of antibody-drug conjugates, which are essentially smart bombs for cancer cells. That's a high-growth area. Pfizer's oncology revenue grew about twenty-five percent year-over-year last quarter. They now have seven blockbuster drugs with annual sales over a billion dollars each, and five of those are in oncology. Luna: So the pipeline is real. But the market clearly doesn't believe it's enough. The stock trades at what—nine times forward earnings? Lucas: Eight point six times, actually. That's cheaper than almost any other large pharma stock. For context, Merck trades at fourteen times, AbbVie at sixteen. So either Pfizer deserves a massive discount because their pipeline is weak, or there's an opportunity for multiple expansion if they deliver. Luna: Which is essentially a value investing thesis: buy a beat-up company with a moat, a good yield, and a catalyst that the market isn't pricing in. Lucas: Precisely. Now, the catalyst isn't guaranteed. They have a few late-stage trials reading out in the second half of this year, including a treatment for alopecia areata and a next-generation pneumococcal vaccine. If those hit, the sentiment could shift fast. Luna: But what about the debt? They took on a lot to buy Seagen. Lucas: Net debt is about thirty billion dollars. That's manageable given their operating cash flow of around twelve billion. They've been paying it down—they reduced debt by three billion last quarter. And they're still buying back stock, which tells you management thinks the shares are cheap. Luna: Interesting. So the buybacks plus the dividend together make for a decent total return even if the stock doesn't move much. Lucas: Exactly. You're getting a six percent dividend, plus they're retiring about two percent of shares annually. That's an eight percent shareholder yield. If the business grows at even low single digits, you're looking at a ten percent plus annual return over time. And that doesn't require any multiple expansion. Luna: Okay, but let me push back a bit. If the thesis is that simple, why isn't everyone piling in? What's the risk? Lucas: The biggest risk is that the pipeline disappoints. If the late-stage trials fail, or if the oncology growth slows, the stock could stay cheap for years. Also, there's patent cliff risk on some of their older drugs. But that's true for every pharma company. Luna: And there's always the risk that the dividend gets cut if free cash flow deteriorates further. Lucas: That's the second-biggest risk. But management has been vocal about maintaining the dividend. They raised it last year by two percent. It's a point of pride for them. Luna: I want to step back for a second. This conversation is exactly why we love doing this show—digging into a specific stock, understanding the math, weighing the risks. And we can do it because we don't have to squeeze in ads. Lucas: Yeah, and that's by design. We keep the show ad-free because we think it makes for better, more honest conversations. If that style resonates with you, you can support us at buy me a coffee dot com slash fexingo. No pressure, just an option if you want to keep this going. Luna: It's a small way to help us keep doing what we do. And we appreciate anyone who does. Lucas: Alright, back to Pfizer. So for someone building a concentrated portfolio, where does Pfizer fit? It's not a growth stock. It's not a safe utility. It's a high-yield turnaround with a catalyst watch. Luna: So it's a satellite position, not a core holding. You'd pair it with something more stable. Lucas: Right. If you look at the broader market, the S&P 500 is yielding about one point four percent. Even value ETFs like the iShares Russell 1000 Value ETF, ticker i w d, yield around two percent. So Pfizer's yield is three times that. But you're taking on more risk. Luna: How would you compare it to other high-yield stocks like Chevron? Chevron yields about four and a half percent now, and it's a much more stable business. Lucas: Chevron is a great core holding for income. It's less volatile, has a stronger balance sheet, and the cash flow is more predictable. But the upside is limited too. Pfizer has more binary upside if the pipeline hits. They're different tools for different jobs. Luna: And JPMorgan yields around two percent, but it's a total return story with dividend growth. Lucas: Exactly. JPMorgan is a compounder. Pfizer is a deep-value income play. Neither is wrong, but you need to know what you're buying. Luna: So what's the one thing you want listeners to take away from this episode? Lucas: Don't dismiss a stock just because it's been a loser. Pfizer has a real business, a real dividend, and a real catalyst. Do your own homework, but at least put it on the watchlist. Luna: And if you already own it, what's the key metric to track over the next six months? Lucas: Watch the free cash flow. If it stabilizes around eight to ten billion, the dividend is safe. If it drops below six billion, you have a problem. Also watch the oncology revenue growth—if it stays above twenty percent, the market will eventually take notice. Luna: Good framework. I'll be watching those numbers too. Lucas: That's it for this episode. We'll be back tomorrow with another stock deep dive.