3% is in the middle. These figures indicate that Pfizer's returns are about average. Aside from an unusually good year in 2007 with respect to their returns, the company is rangebound in terms of its managerial efficiency. Recapturing the 2007 successes would be more encouraging but at present there is little to indicate a long-term trend of improved returns on either equity or assets.

Analysis

Pfizer's performance in the past five years has been uninspiring. The firm has been relatively stationery, especially with respect to revenues. Their business seems to be maturing as well, supported by the fact that the company has steadily increased its dividend. Indeed, without top line growth to attract investors, Pfizer has little choice but to increase the dividend in order to stem the sale of the firm's stock.

Pfizer stock has suffered more than would be expected given the firm's beta. There are two industry factors that make this especially alarming. The first is that pharmaceuticals are demand inelastic, both in terms of price and in terms of the economy. These drugs are a quality of life issue for many, so demand should not fall in light of a financial crisis. Indeed, Pfizer's revenues have remained constant through the crisis. Therefore, the damage to the firm' stock is not related to the market overall.

Rather, it is likely related to concern in the industry with respect to the impact of possible health care reform, and with respect to the skyrocketing cost of drug trials resulting from stricter FDA guidelines. Pfizer also carries some firm-specific issues that have damaged its stock. The company has not been able to increase its revenue over the past five years. Operating income has declined in that period, as has the firm's asset base and the book value of its equity. At best, Pfizer is holding steady; at worst it is shrinking.

This has taken all growth components out of the firm's stock. Management...

This increases the return to investors but has not done so enough to compensate for the removal of growth from Pfizer's economic model.
In the past year, Pfizer has seen some difficulties. Although the bottom line number is better, the company has been subject to a decline in many key metrics. Its current and quick ratios are down. Inventory levels are up and inventory turn is down. While receivables turn is down, it is not unusual for a firm facing difficult financial times to squeeze its customers for quicker payment, especially in light of the fact that collection for Pfizer was in the 2 1/2-month range in 2007.

Pfizer has also increased its debt level recently. After maintaining a stable capital structure for years, the company has finally taken on more debt in order to meet its cash flow needs. This will increase the firm's risk at a point when its business is maturing, which is not a cause of optimism. However, in light of the broader business cycle it is important to remember that rough times do happen and Pfizer's leverage is neither unusual nor dangerous.

Given what has been gleaned from this analysis, I would not purchase Pfizer stock. Nor would I have a few years ago. The stock's performance has been below expectations, and there are major structural reasons for that. The company has stagnated, and increases to dividend yields have not offset the lost growth potential.

There are fundamental issues holding back Pfizer as well. The company's industry is beset with uncertainty and a rising cost structure. The monopoly rents still make being in the pharmaceutical business worthwhile, and Pfizer's healthy margins reflect that. However, the company has certainly not excelled in the difficult circumstances. The returns on Pfizer in recent years have been dismal, and there is no evidence to…