Is This Overlooked Dividend Stock Yielding Almost 6% a Good Turnaround Play?

Pfizer (PFE), which became a household name during the pandemic with its COVID-19 vaccine, has since been struggling. PFE has lost over half of its market cap since peaking in late 2021, and is just barely positive for 2024.

Pfizer’s woes are not hard to understand, as sales of its COVID-19 vaccine, Comirnaty, and the Paxlovid pill have cratered - and unsurprisingly so. The future trajectory of these products, whose sales skyrocketed during the COVID-19 pandemic, also looks shaky. 

Amid PFE’s massive underperformance, activist investor Starboard Value has reportedly taken a stake in the company and has a plan to turn around the struggling pharma giant. The fund, which is led by Jeff Smith, is said to have approached Pfizer’s ex-CEO Ian Read and former CFO Frank D’Amelio, who retired from the company in 2019 and 2021, respectively. 

Meanwhile, even as Pfizer’s stock price has sagged and eroded investor wealth, PFE boasts an attractive dividend yield, which currently stands at 5.75%. Could this overlooked dividend stock finally turn around? We’ll discuss in this article.

Activist Investors Have Been Piling Into Underperforming Stocks

While the broader U.S. markets are sitting on strong double-digit returns YTD, many individual stocks have sagged, and activist shareholders seem to like their chances in some of these names. Earlier this year, Bill Ackman’s Pershing Square took a stake in Nike (NKE), and shortly afterward the company announced that it was replacing its CEO John Donahoe with former CEO Elliott Hill.

Starbucks (SB) also replaced its CEO Lakshman Narasimhan with former Chipotle Mexican Grill (CMG) CEO Brian Niccol. Starboard Value and Elliott Management had both taken a stake in the coffee chain amid its sagging stock price. Disney (DIS)faced a spirited campaign by activist Nelson Peltz, but the company garnered enough support from shareholders to win the proxy vote.

Starboard Might Have a Turnaround Plan for Pfizer

To be sure, corporate “turnarounds” are a much-abused term, and there is no certainty that any of these will succeed. Peloton (PTON) is a very recent example; CEO Barry McCarthy stepped down earlier this year after two years of (unsuccessfully) trying to turn around the struggling fitness equipment company.

The track record of activist investors in “turning around” struggling companies has been mixed, at best. Also, it remains to be seen what action plan Starboard has to revive Pfizer’s business. Notably, Pfizer has already been on a cost-cutting spree, so there might not be much more to squeeze out on that front.

The company’s acquisition strategy has been debatable; while Pfizer has spent almost $70 billion on acquisitions since 2020 – with the bulk going towards buying Seagen – these acquisitions haven’t moved the needle much for the pharma giant's revenues. In the process, Pfizer spent the windfall that it made by selling COVID-19 vaccines and pills. 

That said, with its nearly 6% dividend yield, Pfizer looks like a good stock to buy. Here’s why.

Pfizer Looks Like a Good Stock to Buy

Pfizer has already taken much of the hit from sagging sales of its COVID-19 portfolio, and analysts expect the company’s sales to rise 4.3% in 2024 and 3.3% in 2025. Its per-share earnings are also expected to rise 6.7% in 2025, after the impressive 44% growth that’s expected in 2024 - which, admittedly, comes from a low base.

The company is expanding its portfolio of anti-cancer drugs, with Seagen being a key moving part of that strategy. Management expects Seagen to add $10 billion in “risk-adjusted” sales by the end of this decade. Pfizer expects to double the number of patients treated with its anti-cancer drugs between 2023 and 2030.

On the flip side, though, the company faces multiple patent expirations between 2025 and 2030, which Pfizer estimates will cost $17 billion in annual revenues. The company does have several products in the pipeline, but hasn’t come up with any groundbreaking discovery recently. 

PFE Stock Looks Undervalued

While Pfizer faces both headwinds and tailwinds as far as its business is concerned, the stock’s valuations look somewhat cheap. The next 12-months (NTM) price-to-earnings (PE) multiple of 11x is below where the stock was trading before the COVID-19 pandemic.

While Pfizer made it to Piper Sandler's “concerning” list of stocks, whose dividends it believes are at risk, I believe PFE should be able to maintain and grow its dividend. While a high dividend yield often spells trouble and is a sign of poor growth prospects, I find Pfizer’s dividends to be quite safe, considering its stable earnings.

Pfizer's annual dividend payout for 2024 is pegged at $1.68, while the company projected adjusted earnings per share (EPS) guidance of $2.45 to $2.65 for the year. At the midpoint of the guidance, we get a payout ratio of just above 65%, which looks comfortable and leaves space for deleveraging and share buybacks.

While I don’t expect much in the way of wonders from Pfizer stock in the short term – nor might Starboard be able to bring about extraordinary changes at the company – its “mini-turnaround” has already been happening, and it has announced aggressive cost cuts.

Overall, PFE stock could be a good addition to the portfolios of conservative investors who are looking for stocks with healthy dividend yields that also offer the possibility of protecting and growing their capital.