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Should You Buy Pfizer After its Joint Venture with Glaxo?

December 26, 2018

Investors don’t buy single stocks expecting to own a variety of businesses like a mutual fund. Stocks are bought because of the underlying company. But sometimes a stock really is like a mutual fund—the poster-child of this is, of course, General Electric (GE). This stock is a collection of companies that have little in common with one another.

Management pitched the stock as means of investing for diversity in its underlying portfolio. But what it didn’t tell investors was how it was utilizing its portfolio to pull cash from one holding to prop up others. In the process, investors were largely in the dark as to what each of the individual businesses were actually doing independently and what was the true value of the sum of the parts.

Sure, this is where Wall Street analysts come in. They take the time to do the arduous task of ripping into the holdings. But even many of them got it wrong when it all unraveled.

This is one of the reasons for the new trend of activist investing. The folks working in this area are increasingly becoming effective at forcing mutual-fund-style companies to split up or sell off their holdings and become more clearly focused.

One of the companies that’s coming around to this approach is United Technologies (UTX). The company, which recently acquired Rockwell Collins (COL), has unrelated business units that make HVAC equipment (Carrier), elevator and escalators (Otis) and airplane parts and engines (principally, Pratt & Whitney). But as I’ve written on several occasions, this company needed to break itself into three companies with specific focuses.

And thanks to many activist investors, that’s now in the works over the coming two years. The result will provide investors with separate companies trading under their own names and tickers buy or sell on their standalone merits.

This brings me to Pfizer (PFE). This company is a drug and bio-pharma company that also has a consumer product company. As a result, it has a more highly-valued drug development business that is funded by maintaining existing portfolios of drugs…that is burdened by being in the consumer business, with all of the challenges of marketing, transportation and consumer tastes and demand that distract from the company’s core expertise.

Pfizer recently announced that it is going to move to separate the consumer goods from its drug business. The first step is to set up a cooperative with GlaxoSmithKline (GSK) and move its consumer goods business into that operation.

While not official, I assume that eventually this cooperative will be spun-off or sold, rewarding existing shareholders with shares or cash. And then Pfizer will be a focused company and not a collection of businesses in drugs and consumer products.

The core of the consumer goods makes up 6.31% of the most recent reported quarter’s revenues. So, it won’t be a dire draw-down on revenues if Pfizer breaks off the unit.

In the meantime, it will allow management of Pfizer as well as GlaxoSmithKline to gain efficiencies in the consumer segment while moving the focus towards the higher-growth and better-margin businesses of drug development.

Shareholders should be very happy. Even with the general market mayhem, Pfizer has delivered a total return so far for the year of 18.40%. This is, of course, miles better than the S&P 500’s loss in price of 9.96% and better than the general S&P Health Care Index’s price loss of 0.56%.

As for dividends, Pfizer’s distribution of 36 cents a share should remain well-defended, as the payout ratio is a meager 35.90%. That dividend has been on the rise at an annual average rate of 7.21% over the past five years, for a current yield of 3.49%—again, better than the general S&P 500.

The stock is a good buy right now, with a value of only 3.35 times its book value, even as the book value on the rise over the past year by a nice margin.

Dividends and a better focus on what’s producing results make Pfizer a buy in my book.