As an investor its worth striving to ensure your overall portfolio beats the market average. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. Unfortunately, that’s been the case for longer term Pfizer Inc. (NYSE:PFE) shareholders, since the share price is down 55% in the last three years, falling well short of the market return of around 46%. The falls have accelerated recently, with the share price down 13% in the last three months. However, one could argue that the price has been influenced by the general market, which is down 7.1% in the same timeframe.
Since Pfizer has shed US$11b from its value in the past 7 days, let’s see if the longer term decline has been driven by the business’ economics.
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.
Pfizer became profitable within the last five years. We would usually expect to see the share price rise as a result. So given the share price is down it’s worth checking some other metrics too.
Given the healthiness of the dividend payments, we doubt that they’ve concerned the market. On the other hand, the uninspired reduction in revenue, at 22% each year, may have shareholders ditching the stock. This could have some investors worried about the longer term growth potential (or lack thereof).
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
It’s probably worth noting we’ve seen significant insider buying in the last quarter, which we consider a positive. That said, we think earnings and revenue growth trends are even more important factors to consider. This free report showing analyst forecasts should help you form a view on Pfizer
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. We note that for Pfizer the TSR over the last 3 years was -48%, which is better than the share price return mentioned above. This is largely a result of its dividend payments!
A Different Perspective
Pfizer shareholders are down 15% for the year (even including dividends), but the market itself is up 9.6%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 4% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Take risks, for example – Pfizer has 3 warning signs we think you should be aware of.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of undervalued small cap companies that insiders are buying.