Why Did Buffett Buy Pfizer?

Pfizer Inc. (NYSE:PFE) is one of the largest pharmaceutical companies (and companies) in the United States. When the pandemic hit, the U.S. government granted the company $1.95 billion in funds to develop a vaccine through Operation Warp Speed.

And it wasn’t the only vaccine maker in play, so why did Buffett buy Pfizer?

The government wasn’t the only one looking for a cure – in September 2020, Berkshire Hathaway (BRK.B) invested a lot in big pharmaceutical companies, giving them a boost known as the “Buffett Effect.”

The company invested between $1.8 billion to $1.9 billion each in AbbVie (ABBV), Bristol Myers Squibb (BMY), and Merck (MRK), while snapping up $136 million of Pfizer stock. This caused the companies to pop as much as 2-3 percent versus the benchmark S&P 500.

Buffett’s play earned $300 million from September through November alone, jumping from $5.7 billion to $6 billion, and even more thereafter.

What is Berkshire’s pharmaceutical investment strategy? We look under the hood.

Why Did Buffett Buy Pfizer?

To put things simply, Warren Buffett loves cash. And drug makers are cash cow businesses that operate much like Berkshire Hathaway with deep liquidity reserves.

AbbVie’s 2020 operating cash flow was $16 billion. Pfizer generated $12.5 billion, BMY had $12.4 billion, and Merck had operating cash flow of $11 billion.

Berkshire’s healthcare positioning was relatively low heading into the pandemic. Biogen (BIIB), Teva (TEVA), DaVita (DVA), and Johnson & Johnson (JNJ) were its only holdings for a time.

But the Berkshire CEO is about a decade away from reach the century mark in age. Healthcare should be a top priority – while we often call Buffett a Boomer, the reality is he’s part of the Traditionalist or Silent Generation. He was born in August 1930, so his parents conceived him pretty near the infamous stock market crash of late October 1929.

Now only a decade away from being a centenarian, Buffett was in his 70s when the iPhone was invented and late 80s when TikTok came out. 

He’ll always be Warren Buffett though, so it’s a numbers game at the end of the day. Each of the four pharmaceutical giants he invested in were relatively cheap and have a huge pipeline of new drugs on the way.

We’re on the verge of a healthcare revolution, with research coming for more than COVID-19. Cancer,  strokes, diabetes, colitis, Alzheimer’s, and more deadly and debilitating diseases have innovative new treatments on their way over the next decade.

It’s a fast-growing sector that fits into his lifestyle. Pfizer is just one piece of Buffett’s bid to generate gold in his golden years.

By spreading risk among the various vaccine makers, Buffett smartly hedged his bets. Whoever wins, Buffett wins.

How Much Pfizer Does Buffett Own?

Pfizer is actually the smallest pharmaceutical stake Berkshire Hathaway bought in 2020. The company disclosed a $140 million stake of 3.7 million shares. This comes out to an average of $37.83 per share.

Economic uncertainty keeps Pfizer from breaking out, even with the U.S. government pledging to buy another 100 million doses from it. This is despite Pfizer butting heads with U.S. Department of Health and Human Services over whether it keeps exclusive rights for its Operation Warp Speed-funded treatment.

Should the government renege on its orders or Pfizer run into other problems, investors could find limited growth opportunities. Of course, the pandemic is expected to drag well into 2021 with no real end in sight.

Between anti-vaxxers, distribution delays, and new strains popping up, there’s no telling when the economy will return to normal. What we do know is the pandemic has already dragged on longer than expected. It’s more than seasonal – masks may be a new way of life across the world.

Is Pfizer A Good Investment?

Pfizer is a Fortune 500 company and component of the S&P 100 and S&P 500. This means you’re very likely to already have invested in it through your 401k or IRA. The company has a market capitalization well over $200 billion with a 24x P/E ratio.

It fell to a 52-week low of $27.88 during March of 2020 before virtually doubling. It couldn’t maintain that level in spite of a new White House administration.

That could present a discounted investment opportunity for next year. The company pays a healthy annual dividend of $1.56, and its quarterly cash payment of $0.39 is attractive to income investors.

It was a turbulent 2020, as its price hinged on coronavirus vaccine data with Pfizer and its competitors. But unlike some others in the COVID race, Pfizer is over 150 years old and has a broad manufacturing, distribution, and research pipeline.

Pfizer makes money from internal medicine, oncology, inflammation & immunology, rare disease, and consumer healthcare. Its brands include Chapstick, Preparation-H, Robitussin, Advil, and Viagra. Whatever ails you, Pfizer likely has a drug to treat the symptoms.

Why Did Buffett Buy Pfizer: The Bottom Line

Warren Buffett is one of the most famous and successful investors of our lifetime. More precisely put, his lifetime started during the Great Depression and he made his billions buying stocks when others were fearful of ever lower prices.

He’s gone back to basics, and Buffett is making the plays he would’ve made during the 1929 stock market crash. During a gold rush, you should invest in shovels. In a pandemic – putting your money into vaccine makers seems like a smart play. Hedging your bets among many is even smarter.

Healthcare is a longstanding issue in the U.S., and it’s unlikely to see lower spending over the next decade. We have telehealth, fitness trackers, and treatments for a lot of health conditions in the works. That’s why Buffett invested in pharmaceutical giant Pfizer. It’s on the cutting edge of the next wave of treatments. And whether it wins or a competitor wins, Berkshire and Buffett will end up winning.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.