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How Did Pfizer’s Valuations Change in 3Q15?

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Nov. 12 2015, Updated 3:06 p.m. ET

Valuation multiples

Forward PE (price-to-earnings) and EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization) multiples are two of the best valuation multiples to use when valuing Pfizer (PFE) and other large pharmaceutical companies, given the relatively stable and visible nature of their earnings.

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Forward PE

PE multiples are widely available and represent what one share can buy for an equity investor. On October 28, 2015, the company was trading at a forward PE multiple of ~15.3x. Based on the multiple range over the last five years, 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 for the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Pfizer will definitely be affected. The industry currently trades at a forward PE multiple of ~19.9x. Other competitors Johnson & Johnson (JNJ), Merck (MRK), and Eli Lilly (LLY) have forward PE multiples of 15.6x, 14.7x, and 23.0x, respectively.

Dividend yield

The dividend yield for Pfizer was 3.3% for 2014, and it is estimated at 3.4% for 2015 and 3.5% for 2016. The dividend yield for the Healthcare Select Sector SPDR ETF (XLV) was ~1.5%. Also, the dividend yields 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% while being estimated for 2015 and 2016 at 53.5% and 49.8%, respectively. Pfizer’s mature state has helped it pay regular dividends, so it could be a good option for both growth and income investors.

EV/EBITDA

On a capital-structure-neutral basis, Pfizer currently trades at ~10.2x, which is much lower than the industry’s average of ~14.4x.

The above multiples show improvement in estimates and valuations for Pfizer, which is a positive sign for investors. Investors can consider ETFs like the S&P International Health Care Sector SPDR ETF (IRY) or the VanEck Vectors Pharmaceutical ETF (PPH) in order to divest the risk.

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