Finding Value in the Medicine Chest

Eli Lilly (LLY - commentary - Cramer's Take) and Pfizer (PFE - commentary - Cramer's Take) both boosted their quarterly dividends overnight.

Lilly now pays 42.5 cents a share, a 6.3% increase, indicating a 3.2% yield. Investors at the close of trading Feb. 12 will qualify for the March 9 payment. The company has raised its payout 40 consecutive years and can cover the dividend with 51% of expected 2007 earnings of $3.31 a share.

On the other hand, Pfizer took up its dividend 21% to 29 cents a share, indicating a 4.5% yield. Shareholders at the close of trading Feb. 6 will qualify for the March 6 payment. Pfizer has also boosted its payout 40 consecutive years and can cover the dividend with 53% of expected 2007 earnings. Management also said it will devote $10 billion to its stock buyback program next year.

Even though both companies continue to struggle with their patent expirations and a lack of significant potential blockbusters in their clinical pipelines, I believe that Pfizer's stock will be supported by its yield and share repurchases. The last time the company's yield approached 5%, almost exactly a year ago, it proved to be a great buying opportunity. Pfizer shares could recover to $30 over the coming quarters, plus you'll collect a hefty dividend.

That said, my favorite stock in the group, based on pure fundamentals, is Wyeth (WYE - commentary - Cramer's Take). In the interest of full disclosure, Wyeth is one of the stocks in the model portfolio of the Value Investor newsletter. While the company does not offer a dividend, none of its major products faces patent expiration until next decade, and Wyeth is on track to receive Food and Drug Administration approval for as many as six new products over the next year. In fact, Torisel, an experimental product for kidney cancer, just received priority review status this morning.

With this visibility, the company can deliver double-digit earnings growth over the next couple of years, but Wyeth still trades at just 14.7 times expected 2007 earnings of $3.48 a share compared with 16 times for Eli Lilly. For those readers who are less optimistic in yet another revival for Pfizer or don't have the patience to wait for the dividend, I've been telling Value Investor readers that I believe Wyeth could trade up to $60 over the next year.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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