Pfizer (PFE) is cutting the dividend, primarily driven by their need to allocate cash for Wyeth (WYE) buyout.
The marriage between PFE and WYE is not a union of two love birds. It’s just a short term convenience driven by PFE’s need to soar the bottom line. In fact, I would send kudos to WYE management who has wrestled out good value for WYE shareholders. So why do I think it’s not a good union?
Since last 5 to 7 years PFE management has not been focusing on its historical core strength i.e. new drug development. They have used their cash flow to buy corporations (Warner-Lambert and Pharmacia). Neither of them has provided any real benefit to the company’s bottom line. Yes, Warner-Lambert’s Lipitor is a blockbuster. But then it has messed up PFE’s R&D machine by setting wrong example and precedence that PFE can once again buy their way out. As I had mentioned earlier, corporations are attempting growth and profitability by consolidation and cost cutting (see Market Collision Affecting Dividend Investors). My observation is that PFE’s management has:
- run the R&D division to ground;
- failed to provide any vision to the company and its employees;
- failed to provide any roadmap or direction for their growth;
- shown more interest in buying corporations instead of organic growth; and
- shown more focus on consolidation and cost cutting to soar bottom line.
Now, how can I expect the same management to run even a bigger corporation with much more complexities? The WYE buyout may provide a short term benefit to bottom line (read – cost cutting), but long term, from dividend growth viewpoint; I do not see any potential in this union. Dividend investors need to look at company from 8 years to 10 years timescale and understand if the management is going into right direction.
I am not against buyout, but if there is a focus, reason, and objective then I have no issues. For example, when JNJ bought PFE’s consumer healthcare, there seemed to be a rationale objective and reason behind it. It was not driven by need to improve their bottom line by consolidation and cost cutting measures.
I do not like this and hence I sold my PFE position when I was barely even in my position. I calculated my total return from PFE at +0.1% and this includes dividends, present value of capital, and fees. If factors such as time and inflation are taken into consideration, my total return would be negative.
In future, I would be open to taking any position in PFE if I see any change or progress in management’s long term focus and position vis-à-vis dividends.
Just as an after thought: the existing CEO’s background is in legal profession and running organizations such as MacDonald, Harvard Law Review, etc. It is no wonder that the focus is on growing the bottom line by effectiveness rather than organic growth.
Lessons learnt: (1) Review management’s action and where it is taking the company (2) Initiate with a starter position – my starter position enabled my exit at even.
What are your thoughts on PFE/WYE marriage?