Is Pfizer an Absurdly Cheap Dividend Stock, or Just a Value Trap?

Pfizer (NYSE: PFE) is a high-yielding stock that's trading at a low valuation. The problem is, it's been that way for some time now. The stock's lack of movement in one direction or another seems to suggest that investors may be torn as to whether this is a good investment or not.

In the past 12 months, the stock is down around 2% and has generally been stable, but its poor returns at a time when the market has been hot implies that there is some hesitation from investors.

Is Pfizer indeed a value trap worth staying away from, or is this stock an underrated investment? Below, I'll make the case for both viewpoints and decide which one may be more appropriate.

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The case for Pfizer being a value trap

A value trap means that a stock is trading at an incredibly low valuation, but that's because there are serious concerns about its underlying business. Thus, that prices a lot of risk into the valuation. Pfizer's stock currently trades at a price-to-earnings (P/E) multiple of 15, and that drops to less than 9 when looking at future earnings expectations (based on analyst projections). It's certainly a cheap stock to own.

Investors are right to be concerned about Pfizer's future, as the business is struggling to grow and it faces multiple patent cliffs on key drugs, including Eliquis, Vyndaqel, Ibrance, and Xtandi. Pfizer will likely experience a drop off in revenue in the near term, which could weigh down its earnings.

As that happens, the stock's cheap-looking P/E multiple could quickly rise a whole lot higher, particularly as the company invests more heavily into research and development and increases its efforts to sell approved products to help bridge the gap and make up for declines in revenue.

This year, the company is expecting revenue to be within a range of $59.5 billion to $62.5 billion, which means its top line is likely to be lower than in 2025. It hasn't posted its full-year numbers yet, but in December, it projected its revenue for this past year to total $62 billion. Pfizer has effectively become a no-growth company, and the risk is that its top line may experience significant declines in the future.

The case for Pfizer's stock being a bargain buy

Pfizer's decline isn't about just another stock hitting new lows and trading at a discounted valuation. This is potentially a rare opportunity to buy shares of a top healthcare company that haven't been this cheap in over a decade. Although the stock has bounced off its 52-week low of $20.92, it's still trading around 2013 levels.

Unless you truly believe that the business is in the midst of a severe downturn, you can see tremendous opportunity here. The company is facing patent cliffs, but that's a problem every drugmaker faces at one point or another. More importantly, Pfizer has been making strategic investments and acquisitions in recent years to bolster its growth prospects and to offset those risks.

In 2023, it acquired oncology company Seagen, which develops antibody-drug conjugates that can directly target cancer cells, potentially helping to revolutionize cancer care. Pfizer also recently acquired Metsera, a company that is developing GLP-1 treatments, in what's become a hot growth opportunity in healthcare of late.

There is some uncertainty with Pfizer, but there's also a ton of growth potential, as the company has been investing heavily in its future. On top of it all, it also offers a high dividend that yields a mouth-watering 6.7%.

Is Pfizer's stock worth buying today?

Pfizer looks more like a bargain than a value trap today. Investors can be overly punitive to a business that hasn't been performing well, which is what I think is happening with Pfizer. But as the company shows progress via its acquisitions and its expanding pipeline potentially gives investors a new drug to get excited about, it could be just a matter of time before it's off to the races for this deeply undervalued stock.

It may take some time before catalysts appear, but I'm confident that Pfizer, being one of the leading companies in the healthcare sector, can and will prove itself yet again to growth investors.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.