Building a balanced portfolio requires careful planning and execution. You need to think about your long-term objectives for growth and income, as well as tax implications, when you need to adjust your portfolio as you approach retirement.
One stock that might fit well into a diversified portfolio with a 10-year minimum investing horizon is Pfizer (PFE +1.25%), a tier 1 U.S. pharmaceutical company. Pfizer's stock has features that could attract different types of investors. Here are some of its key attractions, and how they could fit with various portfolio strategies.
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Pfizer: An overview of the stock
Core business model: Pfizer has a diversified portfolio of products that reduces its exposure to patent expirations and market competition. Unlike some of its rivals, which rely heavily on one blockbuster drug for most of their revenue, Pfizer currently has no single product that accounts for more than 15% of its annual sales.
During the pandemic, its COVID-19 solutions were an exception to this rule, but Pfizer is returning to its normal strategy based on a "strength in numbers" approach to value creation. This conservative-leaning strategy makes Pfizer a less-risky pharma stock to own, as it rarely experiences volatile swings in its top line.
Now, its post-pandemic performance is a glaring exception to this historical trend. But Pfizer does appear to be getting back to business as usual, so to speak.
Growth outlook: The bad news is that Wall Street thinks Pfizer will deliver only low-single-digit revenue growth over the balance of the decade, thanks to a mix of new competition in key therapeutic areas, an ongoing portfolio churn, and some key setbacks in the clinic in the recent past. This situation could change with a major win in the clinic or a savvy business-development move. But for now, Pfizer appears to be on a low-growth trajectory.
Valuation: Despite these challenges, Pfizer's stock is attractively priced at the moment. The company's shares are trading at only 12.6 times projected earnings, which is low for a major drug manufacturer. The company also offers a generous dividend yield of 5.91%, which is much higher than the average S&P 500 stock or short-term government bonds. However, the company's high payout ratio of 89% and modest growth prospects raise some doubts about the sustainability of its robust dividend program.
Dividend growth: Pfizer has raised its cash distribution to shareholders at a compound annual growth rate of 4.91% over the prior 10 years. That's about average for a megacap company. As such, Pfizer's stock doesn't stand out as a top-tier dividend-growth vehicle.
How does Pfizer fit into a portfolio?
Due to its limited growth prospects, Pfizer doesn't screen as either a top value or growth play. However, its low earnings multiple and high yield make it an intriguing income play. While Pfizer may have to pull back on growing its payout in the short term, the drugmaker should be able to continue to pay a top-shelf yield for the foreseeable future.
Keeping with this theme, the company's low valuation also gives income investors a decent margin of safety. The stock is unlikely to drop much further after last year's 43.8% decline, combined with this year's anticipated return to low-single-digit top-line growth.
NYSE: PFE
Key Data Points
Pfizer seems best suited to an income-generating role in a well-diversified portfolio. This big pharma stock probably won't deliver excess returns relative to the S&P 500 over the next 10 years, but its generous dividend could serve as a low-risk source of cash.
