Over the last year, I’ve been railing at readers to keep as far away from Pfizer as possible, and Growth Stock Wire subscribers have certainly gotten an earful of my Pfizer bashing. (If, by some chance, you missed my rants, here’s one of my favorites. It offers investors three ways to cash in on the drugmaker’s demise.)

By no means do I get ‘em all right. But as you can see from the following chart, my Pfizer call has been spot-on. The stock’s taken a 32% nosedive over the last year, 10% in the last month alone.

Pfizer stock is now selling for around 10 times free cash flow – outrageously cheap. Even more tantalizing is its 7% dividend yield. But don’t let the fat dividend tempt you…

At 7%, Pfizer’s dividend is the drug industry’s highest, more than double the industry average (3.3%), and three times larger than the S&P 500 average (2.2%). Right now, the stock’s high yield is the one thing protecting Pfizer’s shareholders from utter catastrophe…———- Advertisement ———-
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But Pfizer’s dividend will disappear in less than two years.

The company has close to $30 billion in the bank, so you might think I’m crazy to question its hefty payout. And the company’s CEO and CFO claim the dividend is not only safe, but should grow 10% this year (barring any “significant events”). I don’t buy it…

To take advantage of lower foreign tax rates, Pfizer holds a majority of its cash, as much as 75%, outside of the U.S. But American corporate dividends must be paid from U.S.-based funds. Uncle Sam would wallop Pfizer with a staggering tax bill if the company brought foreign cash back home. So rather than pay the taxes, the company borrowed money this year to fund its dividend, upping its short-term debt by 50%.

Next year, to maintain its dividend without adding to debt, the company needs to bring in $8 billion in cash. To increase it 10%, as management suggests, the figure is closer to $9 billion. That’s possible, if difficult, with the company’s current free cash flow around $10 billion per year. But Pfizer is set to lose its top-selling cholesterol drug, Lipitor, to generic competition within two years. Lipitor brings in $13 billion a year and accounts for roughly 65% of the company’s annual free cash flow.

To make up for the loss, the company has cut costs, dumping 10,000 employees (including the chemist that developed Lipitor) and halting its share repurchase program (even with the stock bouncing off multiyear lows). But now that the easy cost-cutting measures are through, Pfizer’s management must be eyeing the annual dividend payment.

I don’t see how the company can keep up its high yield, let alone increase it, without taking on even more debt. When you’re borrowing to expand, that’s one thing. When you’re borrowing to throw the money out the door, that’s another.

So it’s a matter of “when,” not “if,” the Pfizer dividend yield falls at least back to levels in line with its peers. When this happens, you don’t want to be a shareholder. I’d expect another 40% drop from today’s depressed trading levels.

The dividend cut could come a lot sooner than expected, too. I had a good chuckle at management’s “significant events” disclaimer. I waited for the obvious question that nobody asked – Does the loss of a $13 billion annual drug franchise count as a “significant event”?

Good investing,

Rob Fannon

P.S. I’ll be in San Diego all next week at BIO 2008, the year’s largest biotech conference. In next Friday’s Growth Stock Wire, look for my report on the best ideas I find.

Source: Don’t Be Suckered in by This Big Dividend

“Soaring prices of grains, dairy and meat have been grabbing global headlines,” says Jennifer Yousfi in Money Morning, “but other commodities have been on the rise as well.

“I’m not talking about the increases in daily staples that make the front page, but those little extras that make daily life just a little bit sweeter – coffee, cocoa and sugar. We might not need them, but we definitely want them. And inflation is putting upward pressure on the price of these soft commodities just as it is on oil and grains such as wheat and rice.”

As demand for food increases, it’s a great time to invest in a livestock ETF, says Ian Davis in The Growth Stock Wire: “Hog farmers are not running charities. When the input costs for hog producers soar, the price of hogs must also rise. By buying hogs, we are piggybacking (excuse the pun) on the uptrend in agriculture and crude oil.

“So when the uptrend finally begins, how should we play it?”

Read on how to profit when this upswing kicks in with this livestock ETF.

“When the gold price rises, jewelry gets more expensive,” says Tom Dyson in DailyWealth. It’s the same way with farm animals. When the corn price rises, livestock must get more expensive. Corn has doubled in the past 18 months, but livestock prices are still in the same range they were six years ago. They will catch up with corn.”

Tom also recommends that his readers invest in a livestock ETF.

“Two trade in London under the symbols CATL.L and HOGS.L,” says Tom. “They track the Dow Jones AIG sub-indexes for live cattle and hogs.”

Production will increase 17 percent from a year earlier to 1.78 billion bushels, the most since 1998, the U.S. Department of Agriculture forecasts. About 4 percent more acres were seeded from September to November, the agency said. Wheat prices have tumbled 45 percent from a record $13.495 a bushel on Feb. 27.

“High prices beget low prices,” said Dan Kuechenmeister, a manager of the commodities department at RBC Dain Rauscher in Minneapolis. “We’ve seen a lot of wheat planted, and we’re finally going to get a decent harvest.”

Prices will rise again, so now is a great time to invest in a livestock ETF, says Ian Davis in The Growth Stock Wire: “Hog farmers are not running charities. When the input costs for hog producers soar, the price of hogs must also rise. By buying hogs, we are piggybacking (excuse the pun) on the uptrend in agriculture and crude oil.

“So when the uptrend finally begins, how should we play it?”

Read on how to profit when this upswing kicks in with this livestock ETF.

“When the gold price rises, jewelry gets more expensive,” says Tom Dyson in DailyWealth. It’s the same way with farm animals. When the corn price rises, livestock must get more expensive. Corn has doubled in the past 18 months, but livestock prices are still in the same range they were six years ago. They will catch up with corn.”

Tom also recommends that his readers invest in a livestock ETF.

“Two trade in London under the symbols CATL.L and HOGS.L,” says Tom. “They track the Dow Jones AIG sub-indexes for live cattle and hogs.”

When readers of my 12% Letter took their position in October 2006, Westshore sported an 11% dividend. Once the world caught on to the story, investors “chased the yield,” making Westshore behave like a growth stock. That pick returned 80% in the first 18 months.

Today I’m going to show you why Westshore was the perfect income play… and how you can spot the market’s best income investments. Let’s get started…

To qualify as a perfect income play, a company must 1) run a simple business, 2) be unable to expand its operation, 3) enjoy a huge “moat,” and 4) pay very little (if any) taxes. Here’s how Westshore measured up:

First, Westshore’s business couldn’t be simpler. The railroad brings the coal to Westshore’s Vancouver terminal. Westshore removes the coal from railroad hoppers, piles it up using a system of conveyor belts, and then reloads this coal onto ships. Westshore never owns the coal. It simply earns commissions from the coalmine it serves.

Simplicity is important because it’s easy to identify the risks in a simple business. All businesses carry risk, but if you can identify them, you can make a more accurate assessment of a company’s value.

Would you rather make a bid on a vast corporation with myriad operations and opaque accounting – say, Citigroup – or a coal terminal like Westshore? I always give more value to dividends from simple businesses than from complicated businesses.

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Second, Westshore has no way to expand its business. The terminal sits on the head of a spit in the waters south of Vancouver. The railroad tracks run around the perimeter of the spit. Westshore piles up the coal in the center of the spit. There are two docks, a pair of gantry cranes, a parking lot… and just enough room for a couple of prefabricated cabins where management runs the operation.

It may sound odd to say we’re looking for companies that can’t expand, since most investors are drawn to growth. But we’re not looking for growth. We’re looking for income. Expansion is a distraction… and often a big waste of money.

Businesses that can’t expand have the most focused management teams and pay the safest dividends. We want a company that pumps cash into its dividend, not its capital-expense budget.

Third, Westshore has a huge business moat, meaning there are significant barriers to competition. Westshore exports metallurgical coal. Forges use “met coal” to make steel. There is no substitute for Westshore’s coal. The world will always need steel… And the coalmine has enough coal to last for another century. A couple of other terminals export coal from western Canada. But they’re too small to make any dent in Westshore’s revenues.

We want a business that enjoys a wide moat. Moats protect castles from invaders. In business, moats protect dividends.

Finally, Westshore is an income trust. As long as these companies pay out all their earnings to shareholders, they don’t have to pay tax. Companies that don’t pay tax have more money to return to shareholders.

Of course, our Westshore position was a victim of its own success. The share price appreciated so much, its yield diminished and a modest price correction triggered our stop loss… As much as I love Westshore’s business, it’s still too expensive to leap back into today.

But you can find similar opportunities. Look for simple, straightforward businesses that pay few taxes, enjoy a healthy competitive advantage, and are unlikely to spend their money on anything but your dividends.

Good investing,

Tom

P.S. Westshore Terminals was my first pick in The 12% Letter, and it’s my best-performing so far.

Source: The Perfect Income Investment

According to a report by Bloomberg, cattle prices may rise 13% by the end of the year on the Chicago Mercantile Exchange and Brazil’s Bolsa de Mercadorias e Futuros. More from this story:

Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed. Cattle are the seventh-worst performer of the 26-member UBS Bloomberg Constant Maturity Commodity Index in the past year, a time when soybeans, oil and copper jumped to records. After adjusting for inflation, cattle are down 27 percent from their 1988 peak.

“It’s pretty certain that we’ll see a decline in domestic supply in the U.S.,” Joesley Batista, chief executive officer of JBS SA, the world’s biggest beef producer, told reporters in Sao Paulo on May 15. “As a result, we’ll have price hikes and improved margins.”

Production also is dropping or failing to keep pace with demand in China, Brazil and the European Union, mostly for grain-fed beef, analysts and government data show.

“We expect meat prices, especially beef prices, to rise this year,” said Peter Weeks, chief economist at Meat & Livestock Australia, a trade group in Sydney. “We’ve already seen big increases in beef prices in China, Russia, India and throughout Southeast Asia.”

Now is a great time to invest in a livestock ETF, says Ian Davis in The Growth Stock Wire. And hog prices are set for a similar upswing to cattle prices.

“Hog farmers are not running charities. When the input costs for hog producers soar, the price of hogs must also rise. By buying hogs, we are piggybacking (excuse the pun) on the uptrend in agriculture and crude oil.

“So when the uptrend finally begins, how should we play it?

Read on how to profit when this upswing kicks in with this livestock ETF.

“When the gold price rises, jewelry gets more expensive,” says Tom Dyson in DailyWealth. It’s the same way with farm animals. When the corn price rises, livestock must get more expensive. Corn has doubled in the past 18 months, but livestock prices are still in the same range they were six years ago. They will catch up with corn.”

Tom also recommends that his readers invest in a livestock ETF.

“Two trade in London under the symbols CATL.L and HOGS.L,” says Tom. “They track the Dow Jones AIG sub-indexes for live cattle and hogs.”