Investors don’t buy stocks because they are mutual funds. Stocks are bought because of the underlying company. It seems like Pfizer (NYSE:PFE) has gotten the memo and is acting to protect PFE stock.
The poster-child of the stock as mutual fund is of course, General Electric (NYSE:GE). GE stock really was and still is a mutual fund: a collection of companies that had or has little in common with each other.
General Electric management pitched GE stock as means of investing for diversity in its underlying portfolio. But what it didn’t tell investors was how it was pulling cash from one holding to prop up others. And in the process, investors were largely in the dark as to what each of the individual businesses were actually doing and what the true value was of the sum of GE’s 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.
And now, we have the term in the market called activist investing. The folks working in this area are increasingly becoming effective at forcing mutual fund-style companies to split up their holdings and become focused companies.
One of the companies that’s coming around to this approach is United Technologies (NYSE:UTX). The company that recently acquired Rockwell Collins also has unrelated companies that make HVAC equipment (Carrier), elevator and escalators (Otis) and airplane parts and engines (Pratt & Whitney). But as I’ve written on several occasions, UTX 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 specific companies and their own stocks to buy or sell on their stand-alone merits.
Pfizer’s Latest Move Will Be a Boon for PFE Stock
This brings me to Pfizer. This company is a drug and bio-pharma company that also has a consumer product company. And as a result, it has the more highly-valued drug development business that is funded by maintaining existing portfolios of drugs, and which is burdened by being in the consumer business with all of the challenges of marketing, transportation and consumer tastes and demand that distracts 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 (NYSE:GSK) that will move its consumer goods business into the operation.
And in turn, while not official, it can be assumed 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, this won’t be a dire draw-down on revenues for the potential end-game of a break-off of the unit.
And 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. And 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%.
And for dividends, Pfizer’s distribution of 36 cents a share should remain well-defended as the payout ratio is a meager 35.90%. And that dividend has been on the rise on an annual average of 7.21% over the past five years for a current yield of 3.49% — again better than the general S&P 500.
And the stock is a good buy right now with a value of only 3.35 times its book value that has been on the rise over the past year by a nice margin.
Dividends and a better focus on what’s producing makes Pfizer a buy in my book.
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.
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