PFE stock still has good upside potential, especially if the dividend yield drops

In March I wrote that Pfizer (NYSE:PFE) was a good value opportunity as it was trading “well below its historical valuation parameters”. At the time, I estimated it was worth $ 42.39. Since then, PFE’s stock has grown from around $ 35 to around $ 39.

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I now think the PFE stock could have a lot more potential if its dividend yield drops. This is based on the fact that the return is likely to drop if the company starts to buy back again.

So here’s what you need to know about Pfizer stocks going forward.

PFE Stock: Finding Value Using Dividend Yield

Much of my previous analysis was based on a historic dividend yield of 3.8% and an annual Pfizer dividend of $ 1.56 per share. This is based on a quarterly dividend rate of 39 cents.

I now think the yield could fall below 3.0% and its dividend rate will likely rise to $ 1.60 on an execution rate basis. This is based on an expected quarterly dividend rate of 40 cents per share.

Therefore, this implies that the estimate of the fair value of the PFE stock could be as high as $ 53.33. Here’s how I determine that: Take $ 1.60 and divide it by 3.0%. This comes down to $ 53.33.

This shows that PFE stock could easily rise $ 14.36, up from its June 3 price of $ 38.97 to $ 53.33. This represents a potential gain of almost 37% for the title.

Why am I saying that ? First, Pfizer tends to increase its quarterly dividend by 1 cent per quarter every four quarters. He has already paid 39 cents a share for the last two quarters. Its next dividend declaration date will likely be around June 22. After the ensuing 39-cent statement, the PFE stock will likely begin to reflect the expectation of a quarterly dividend of 40 cents (i.e. $ 1.60 per year).

Second, PFE stock now has a dividend yield of 4.0% (i.e. $ 1.56 / $ 38.97). This is different from his average historical dividend yield of 3.81% (i.e. sometimes much lower and sometimes much higher), which is noted on In search of the alpha.

Therefore, even if the PFE stock traded with its expected higher dividend rate (i.e. $ 1.60 per share) than its historical average, it would be worth around $ 42 (i.e. i.e. $ 1.60 / 3.81% = $ 42).

How redemptions will reduce the dividend yield

But I suggest that the price of PFE stock could rise, to the point that its dividend yield will drop to the 3.0% level. Indeed, if you look at analysts’ projections for earnings over the next few years, you can see that earnings will be very stable and only increase slightly.

However, until last year, Pfizer was making significant buybacks. He stopped doing it when the pandemic hit. Now, however, I suspect he may have to start over, given the poor growth in earnings per share (EPS). This will tend to raise the share price and lower the dividend yield.

For example, in the year ending March 31, Pfizer generated $ 15.8 billion in operating cash flow (CFFO) and spent $ 2.35 billion in capital expenditures. . This implies an annual free cash flow (FCF) of $ 13.45 billion. This is seen from In search of Alphas page on his historical cash flow statements.

This represents an FCF return of 6.19% on its recent market value of $ 217.13 billion. But the dividend yield is only 4.0% (see above). This leaves room for 2.19% of its stock (i.e. 6.19% FCF yield minus 4.0% dividend yield) to be redeemed. The effect of this will reduce the dividend yield to 3.0% and push the PFE stock up to $ 53.33.

What to do with PFE Stock

Management will really have no choice but to start these buybacks again in order to help drive up the stock of PFE.

For example, the dividend currently costs around $ 8.5 billion at 39 cents per share each quarter. That leaves $ 4.95 billion that could be spent on buybacks ($ 13.45 billion in FCF – $ 8.5 billion).

Of course, this assumes that no part of the difference is used to pay off the debt. So maybe not all that amount will be spent on buyouts. But even if only $ 3 billion is used to repurchase stocks, that still represents a “redemption yield” of 1.38% (i.e. $ 3 billion / $ 217.13 billion in value). Merchant).

This is how the dividend yield could fall by 1 percentage point according to my forecasts, from 4.0% to 3.0%. This is called the concept of total return, adding the redemption yield to the dividend yield. It could also create a significant increase in the stock of PFE.

As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, submitted to Publication guidelines.

Mark Hake writes about personal finance on and run the Total Value of Return Guide that you can consult here.

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