Why I Am Disappointed In Pfizer

At Harvest we have been very happy shareholders of Pfizer since we started (and even before). We saw a company with a pristine balance sheet and a very attractive dividend yield (most recently at over 8%). We recognized that the company faced a likely earnings shortfall in a few years when the Lipitor patent expires. But, we felt the company had time and the financial ability to address the problem through its own pipeline, the strategic purchases of drug compounds still in trials or the acquisition of small companies that could benefit from Pfizer’s size. We also were very pleased to see management, under Jeff Kindler, work hard to right size the cost structure of the company.

But our happiness gave way to disillusionment last week when Pfizer announced its plan to purchase Wyeth. We see no great growth benefits from the combination, only large cost reductions. While cost reductions are valuable, the price Pfizer is paying for them is too high in our estimation. Pfizer is significantly weakening its balance sheet, paying a high interest rate to borrow money from the banks (while gambling that the credit markets will thaw in the next year as this debt matures in 12 months) and cutting its dividend in half.

As shareholders, the dividend was one of the reasons we liked the company and we felt that it was safe. It has been the one reward for shareholders who have suffered while the stock price dropped by over 50%. Instead, management reduced the dividend to make an acquisition that shareholders were clearly not thrilled about (note how the stock has dropped over 10% while the S&P is flat).

We thought Kindler and his management team saw the value of cash and a strong balance sheet in such tough economic times. Instead, he appears to be like so many other CEOs, only concerned about the size of his empire and not at all concerned about his shareholders. We thought shareholders were in better hands. We were wrong!

(Disclosure: Harvest Financial Partners owns Pfizer in it client portfolios. The author owns Pfizer in his porfolio. Positions may change at any time.)