A Haven Income Investment for a Roiled Market

An industry leader offers high-yield income and price stability to nervous investors.

The past few weeks have been a gut check. Many investments thought to be low volatility have turned out not to be. Big oil comes immediately to mind.

pharmaceuticals

Big oil has indeed been volatile. Big pharma, in contrast, has been assuredly staid. One of the biggest of big pharma, Pfizer Inc. (NYSE: PFE), has been particularly adept at calming investor nerves. Over the past month, Pfizer shares have steadily made for higher ground.

And even higher ground awaits. In recent years, Pfizer has shifted its focus to its core pharmaceutical business.

In November 2012, Pfizer sold its nutrition business to Nestle SA for $11.8 billion. The proceeds from the Nestle deal went toward share repurchases and business development. A few months later, it completed an IPO of about 20% of the stock of its Zoetis animal-health unit, raising $2.2 billion.

These divestitures shrank Pfizer’s annual revenue to $51.6 billion in 2013 from $58.9 billion in 2012. Guidance for 2014 reflects a flat year, as the company continues to shed non-core businesses. In 2015, annual revenue will likely remain flat, posting at around $49.5 billion.

Pfizer still maintains a full plate of solid pharmaceutical offerings.

Lyrica, a treatment for nerve pain and epileptic seizures, posted $4.6 billion in sales for 2013.  Sales of Xalkori, a drug used to treat advanced or metastatic lung cancer, jumped 134% to $282 million over the same period. And despite losing patent protection on popular Lipitor and Viagra, both drugs still generate over $2 billion in annual revenue each.

But investing is always about the future. On that front, Pfizer is well-positioned to break into new markets. As of the end of 2013, Pfizer’s pipeline consisted of some 81 compounds, including 59 new molecular entities (NMEs), 18 supplemental indications, and four biosimilars. Of the total, 26 were in late-stage Phase 3 or in registration.

These compounds include new treatments for a wide range of prevalent health conditions, including cancer, AIDS, obesity, arthritis, heart disease, diabetes, and pain. When you consider demographic trends, demand for many of these treatments will grow over time.

The U.S. Census Bureau states that there are 40.2 million Americans 65 and older, and they account for 13% of the U.S. population. That number is expected to swell to 88 million and account for 20% of the population by 2030, and remain at that elevated level going forward.

Obesity is another trend. When you look around, it’s not hard to believe that obesity is endemic. It’s even more prevalent in older age groups, where nearly 70% of those over the age of 60 are overweight (with a Body Mass Index of 25 and above), according to the Journal of the American Medical Association.

With more old age and more obesity comes more infirmity and more drug demand.

Trading at around 14 times 2014 EPS estimate of $2.23, Pfizer’s valuation is among the lowest in the pharmaceutical sector, and near Pfizer’s historical low. Over the past 10 years, Pfizer’s P/E multiple has ranged between 9 (hit during the 2009 recession) and 27.

To be sure, Pfizer is no longer the exceptional earnings-growth company it was in past decades. EPS for 2015 will likely increase to only $2.30, which would push the P/E multiple below 14. That’s still a value, though, when compared to the large-pharmaceutical competition.

Pfizer’s dividend, which yields 3.3%, also helps serve as a ballast and as an investor draw. The dividend, on average, has been increased 9.6% since 2010.

Stable dividend growth in a low-volatility investment is what the doctor is prescribing for nervous investors. Pfizer offers both.

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Published by Wyatt Investment Research at