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With £1,000, I’d buy 45 shares of this unloved dividend stock for a passive income boost

Engineer Project Manager Talks With Scientist working on Computer
Image source: Getty Images

It’s fair to say the stock market has gone off Pfizer (NYSE:PFE) shares. But I think this could be a great stock to consider for investors looking to generate passive income.

The stock is now trading 24% below its pre-pandemic levels. But while the company’s fortunes have waned, the 6% dividend yield looks like an opportunity to me.

Vaccine demand

Falling demand for Covid-19 vaccines is a big part of the reason the Pfizer share price has fallen. The firm is expecting only around 24% of the US population to receive boosters this year.

Obviously, that’s a significant decline. And the impact hasn’t just been in terms of lower revenues, but also non-cash charges for product write-offs affecting the company’s bottom line.

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The question for investors, though, is whether the business is really worth less than it was before the start of the pandemic. I don’t think this is the case.

Demand for Covid-19 vaccines might have fallen, but Pfizer has been investing its windfall for the long term. This includes the acquisitions of Seagen and Seegene to boost its future pipeline.

Earnings outlook

Without deep specialist knowledge, assessing precisely the prospects of a big pharmaceutical company is difficult-to-impossible. And this is a risk investors should consider.

Arguably, though, when shares trade well below what they’re worth, a precise assessment isn’t necessary. A stock selling for £10 is clearly cheap whether its intrinsic value is £30 or £35.

I think this might be the case with Pfizer. At the moment, the share price is around $27, but the most conservative estimates forecast earnings of $2.22 this year, rising to $3.04 by 2027.

That implies a price-to-earnings (P/E) ratio of around 12 this year, falling to nine within three years. And there’s another reason to be optimistic about the company’s prospects.

Size and strength

A common argument against investing in big pharmaceutical firms is their size makes it hard to generate meaningful growth. There’s some truth to this, but size also has its advantages.

In other sectors, larger companies with bigger balance sheets seem to be using their size to their advantage. This has been the case in both technology and energy.

Microsoft, Alphabet, Meta, and Nvidia have been dominating the AI space and ExxonMobil and Chevron have been expanding aggressively in oil. And a lot of this has been via acquisitions.

This illustrates the advantage of size and scale. And with healthcare, I think Pfizer has a similar advantage at a P/E ratio that looks like a bargain compared to the big tech and energy stocks.

A buying opportunity?

I think Pfizer shares look like a great long-term opportunity. It looks to me as though there’s a real chance the stock market is overlooking the company’s medium-term earnings potential.

Without a more thorough specialist assessment, I wouldn’t go all-in on the stock. But I think investing £1,000 to add 45 shares to my investment portfolio could be a really good move.

I’m not anticipating huge forward growth from a $155bn company. At today’s prices, though, I don’t think it needs it and I expect Pfizer’s size to help it maintain its position for some time.

The post With £1,000, I’d buy 45 shares of this unloved dividend stock for a passive income boost appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet, Meta Platforms, Microsoft, and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024