After a 48% fall since the start of the year, Pfizer (NYSE:PFE) shares are firmly in value stock territory. The fall in demand for Covid-19 vaccines has been weighing on the company’s share price.
The stock comes with a 6.35% dividend at today’s prices. But there are a few things UK investors should note before considering buying the stock for a passive income portfolio.
Payout
Let’s start with that dividend. UK investors should note that distributions from US companies – such as Pfizer – are subject to a 15% withholding tax.
As such, the yield I’d actually get from buying the stock at today’s prices would be more like 5.35%. There are other variables like exchange rates to consider as well, which can have an effect.
This doesn’t put me off buying the stock at the moment and owning US shares is a good way of diversifying a UK-based portfolio. But it’s something that’s worth considering.
The biggest risk with buying shares for passive income is the dividend being cut. And Pfizer noting that US vaccine rates have dropped from 70% to 20% now suggests there might be a danger of this.
It’s worth noting, though, that the dividend for March 2024 is higher than the average quarterly payout from this year. So the potential decline in vaccine sales doesn’t look like an immediate issue.
Long-term prospects
Value investing is about more than just dividends, though. It’s about how the underlying business is likely to perform relative to its price today.
Pfizer has a lot of features that give it good long-term prospects. Its scale gives it an advantage over smaller businesses when it comes to distribution and its technical expertise is difficult to replicate.
On top of this, it has a huge budget for research and development. With new drugs having a success rate of less than 1-in-10 from Phase 1 to full approval, this is important.
Warren Buffett notes that pharmaceuticals companies are difficult to evaluate accurately. This is true, but it didn’t stop Berkshire Hathaway from investing broadly in them in 2020.
Charlie Munger later revealed the reason for Berkshire’s investment was that it believed the stocks were good passive income opportunities. And I think that might be the case with Pfizer today.
Margin of safety
Pfizer is going all in on cancer treatments with its huge acquisition of Seagen. I don’t have the technical knowledge to assess how that will turn out, or the prospects for the rest of its pipeline.
It might be that I don’t need to, though. The company has some clear long-term advantages that should allow it to generate steady cash flows for investors.
The stock has struggled in 2023 as demand for Covid vaccines has faltered. But at today’s prices, I think the risk might well be worth it, even for UK investors.
