Breakingviews: Pfizer has unreasonable whiff of the Marlboro Man

What makes Pfizer and Altria alike? They have trouble keeping their customers. The pharmaceutical company’s therapies protecting against and treating Covid-19 are less crucial as the pandemic ebbs, and further products will also eventually be open to competition. The Marlboro maker’s loyal base of smokers is shrinking as people shun deathly cigarettes. Both consequently rely on substantial dividends to convince investors to stick around. Where the two diverge is in Pfizer’s somewhat brighter prospects.

The $130 billion drugmaker generated more than $30 billion of extra cash during the pandemic thanks to its vaccine. But it spent twice as much buying up developers of novel treatments. The worry is that the fruits of this binge may not offset losses from existing blockbusters like blood thinner Eliquis as patent protection expires, drawing in new competitors.

On a total return basis, a Pfizer investor would have lost 20% over the last five years. Mixed results unveiled on Tuesday showed first-quarter revenue falling 8% compared to last year, thanks largely to shrinking sales of its antiviral Covid-19 treatment.

That helps to explain why its dividend yield, or the amount paid out per share relative to its current stock price, sits at 7.5%. The inducement to keep investors around needs to be hefty.

Rabble-rousing shareholder Starboard Value has criticized the company’s lackluster recent record. The discontent will likely discourage further M&A as attention turns to cost cuts, with Pfizer on Tuesday adding a further $1.7 billion to its savings goal for 2027, which now totals about $8 billion. Meanwhile, free cash flow is estimated to top $20 billion a year, according to LSEG data. Given that it only paid out half of available lucre last year, the dividend and buybacks look more likely to increase than fall.

Still, this uninspiring fate is more familiar among terminally challenged businesses. Look at Altria. Its dividend yield is 7%, even as it trades at 11 times estimated earnings over the next 12 months – a 40% premium to Pfizer. Nearly 90% of revenue comes from smokeable products, and cigarette sales are in steady decline.

Price increases, along with chewing tobacco and nicotine pouches, keep revenue steady for now. The company paid $6.8 billion of its near-$9 billion in cash flow out in dividends last year, adding $3.4 billion in stock repurchases. It’s hard to see that increasing, and easy to imagine future cuts as the cigarette market shrivels.

Pfizer, meanwhile, continues to provide life-saving treatments, while its dealmaking at least offers hope of future breakthroughs. At this point, the company’s tobacco-like stench looks unreasonable.