We believe forward PE (price-to-earnings) and EV/EBITDA multiples are two of the best valuation multiples to use when valuing Pfizer Inc. (PFE) and other large pharmaceutical companies, given the relatively stable and visible nature of their earnings.
PE multiples are widely available and represent what one share can buy for an equity investor. On October 20, 2015, the company was trading at a forward PE multiple of ~15x. Based on the last five years’ multiple range, Pfizer’s current valuation is neither high nor low. Over the past five years, Pfizer’s PE multiple has ranged from ~7x to ~16x.
Pfizer’s valuation multiple has also followed the industry’s overall trend over the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Pfizer would be affected.
The industry currently trades at a forward PE multiple of ~19.4x. Other competitors such as Johnson & Johnson (JNJ), Merck and Co. (MRK), and Eli Lilly and Co. (LLY) have forward PE multiples of 15.4x, 13.8x, and 22.7x, respectively.
Given the company’s stability, the dividend yield for Pfizer was 3.34% for 2014, while it is estimated at 3.38% for 2015 and 3.53% for 2016. The dividend yield for the Health Care Select Sector SPDR ETF (XLV) was ~1.5%. Also, the dividend yield for competitors Johnson & Johnson, AbbVie, and Eli Lilly were around 2.6%, 3.3%, and 3.3%, respectively.
The dividend payout ratio for 2014 was 73.6%, and it is being estimated for 53.5% in 2015 and 49.8% in 2016. Pfizer’s mature state has helped it pay regular dividends and could a good option for both growth and income investors.
On a capital structure neutral basis, Pfizer currently trades at ~10.0x, which is much lower than the industry’s average of ~13.9x.