I couldn’t sit on the sidelines too long. After a strong month of purchased in January, which saw me add to my current stakes in ADM and CZNC, I wanted to keep the momentum rolling. At the end of my January dividend income article, I mentioned that I purchased a stock but haven’t disclosed the purchase yet to the community. Well, that is about to change. Last week I unloaded some capital and purchased a stake in Pfizer (PFE). Let’s see why!
Timing is everything and that’s what made this purchase so exciting. PFE actually wasn’t the stock I initially started analyzing. Last Sunday night I was running a few stock screeners and discovered that Abbott Laboratories appeared undervalued after a tough start to 2016. My interest was piqued. They are a Dividend Aristocrat, appeared on our Top 5 stocks with a low debt to equity screener, and announced a 8.3% increase in their dividend in December. The stars were aligning for this purchase and I was getting pretty excited that I would take a chunk out of one of my 2016 goals, which is to purchase 5 new Dividend Aristocrats during the year. Why aren’t I talking about how I purchased ABT this week? Well, I was telling Lanny about ABT and he suggested that I also take a look at Pfizer as well despite the fact they are not a Dividend Aristocrat. He has been a huge fan of the drug manufacturer since he bought them many years ago and suggested that I give them a fair shake before initiating a stake in ABT. So I followed his advice and as I dug through PFE, I started to see some things that I really liked. Here were some of the major selling points for me. I’ll run through some of the metrics of the Dividend Diplomats’ Stock Screener and a few extra metrics.
- Price to Earnings Ratio – Earlier, I mentioned how ABT has taken a bath in 2016. PFE’s has suffered a similar fate as well. The stock price has fallen 9 % YTD and 14% over the last quarter. Using TheStreet.com’s projected 2016 earnings of $2.29, PFE was trading at a PE multiple of ~13X. This passes the first metric of our stock screener as the multiple is below the market.
- Payout Ratio below 60% – Using the current quarterly dividend of $.30/share and the projected earnings of $2.29, I calculated an annual payout ratio of 52%. Right in our payout ratio sweet spot. Passes another metric.
- History of Increasing Dividends – PFE is not a Dividend Aristocrat anymore. During the financial crisis, the company slashed their dividend like many other large dividend paying institutions. The consecutive dividend increase streak is only at 6 consecutive years; however, the company has been paying for over 300 consecutive quarters. It isn’t as if PFE was a new company that increased their dividend too quickly. No, PFE has a long-term track record of paying a dividend that was forced to make a tough decision and cut the payout in tough times. This has a different feel than other dividend cuts I received in 2015. In December, PFE announced a 7% dividend increase from $.28/share quarterly to $.30/share quarterly.
- Dividend Yield – The stock price at the time of purchase was ~$30/share, so the yield was hovering around the 4% mark. Can’t complain about that yield + increase as highlighted in the precious bullet.
- Dividend Growth Rate – Subsequent to cutting their dividend in 2009, PFE has increased their dividend annually. The 3 and 5 year average dividend growth rate is 8.2% and 9.0%, respectively. Sure, it sucks they cut their dividend. But management has continued to increase the dividend by a high single digit percentage. It is greater than my portfolio’s weighted average growth rate, so that’s a huge victory!
- Strong Brands – If you have followed this website over the last year and a half, it is no secret that I love companies with strong brands. What is more valuable than having a product portfolio that is in everyone’s household and is a part of their daily life routine? I visited and left PFE’s website extremely impressed with their current portfolio, which is only going to get stronger after the purchase of Allergan. Some of the major brands in PFE’s portfolio include Advil, Lipitor, Viagra, Celebrex, and Lyrica. The best part is that those brands are just one of many in their product portfolio. The one downside to the pharm industry is that PFE will have some key patent’s expire soon. However, I have been reading articles over the last month indicating that PFE has a strong pipeline of new drugs that will help fill the void when other patents expire. That’s one of the advantage of being the largest in the market, PFE has a large R&D budget to help develop and fund their success. And if there is a hole in the development timeline, they can always use their hoard of cash to purchase another drug such as Allergan.
I left my researched convinced that PFE is a great fit for my portfolio. All in all, I purchased 100 shares of PFE with a cost basis of $3,019. This added $120 to my annual dividend income, which is one heck of a sum. I really took Lanny’s idea of purchasing stocks in at least $3,000 chunks to heart. What’s cools is that I now will receive about 1 new share per quarter if the price remains at its current levels. Lanny was even joking with me that I can write options now if I would like. However, I’ll wait a little longer to start messing around with that arena. I mentioned earlier that timing was everything and there was one other key fact that convinced me to purchase PFE over ABT this quarter. I really wanted to capture four dividends from one of the stocks during the year. I just missed ABT’s ex-dividend date, which irked me. However, I began my PFE research 2 days before their earnings release and ex-dividend date. What timing and what luck! I snuck in right before the deadline and now I will receive that March dividend, which was very important to me. All in all, I couldn’t be happier with my purchase and this new addition to my portfolio!
What are your thoughts about purchasing PFE? Would you have opted for ABT instead? What other stocks are on your radar? Do you purchase stocks in large volumes or do you prefer purchasing more companies at a lower value?
-Bert