Shares of Pfizer Ltd and Wyeth Ltd turned red hot in the market today not only because of the merger of the two pharma MNCs but also the generous dividend payout announced by both companies ahead of the merger.

While the ratio of merger of 7 shares of Pfizer for every 10 shares of Wyeth made the merger skewed slightly in favour of the latter, what worked for Pfizer was the huge interim dividend payout of Rs 360 per share compared to Rs 145 per share announced for Wyeth shareholders before the merger becomes effective. 

Shares of Pfizer hit a 52-week high of Rs 1,628 before easing a bit to Rs 1,615, a huge gain of Rs 178.45 on the NSE with a trading volume was 4.68 lakh shares.

Wyeth was trading at Rs 943, a gain of Rs 129.55 or 15.92 per cent. The stock came close to its 52-week high of Rs 985 on the NSE that it touched on November 30 last year, when it reached a high of Rs 976.80 in the early trade today but shed some of the gains later. But it had made a significant recovery from its 52-week low of Rs 554.70 that it hit on September 4 this year.

Investment details

A fresh investment of 10 shares in Wyeth, at current levels, would cost the investors about Rs 9,450 plus costs associated with the acquisition. For this, the investors would get in return a dividend of Rs 1,450 which is a pretty reasonable return. In addition, they would get 7 shares of Pfizer post merger worth about Rs 11,500 at today’s cost. 

For any new Pfizer investor, a similar investment in 10 shares would cost about Rs 16,150 plus trading cost. But the investor would get a dividend return of Rs 3,600 on this investment as the board of directors of Pfizer has approved interim dividend of Rs 360 per equity share of Rs 10 each (3600 per cent), to be paid on December 17. Probably this had weighed with the investors as the stock price witnessed a huge surge in the afternoon trade today.

Downside risk

What the investors may probably view is the downward risk of their investment at the current levels in these two stocks subsequent to the record date for payment of such a high dividend, as it is reasonable to expect that the stocks might correct to some extent.

The other important point to consider would be how much the market might correct once the US Fed starts cutting back on its bond buying programme. Moreover, as a defensive investment, pharma stocks have run up quite a bit and the potential for further price rise in these counters in the near term may be limited. 

Aijaz Tobaccowalla, MD of Pfizer India and Wyeth India, in a release on November 23 announcing the merger decision, said that this would pave the way for the creation of ‘a single Pfizer brand’.

The combined entity would have an ‘increased therapeutic presence and a de-risked business profile’ and the merger process is expected to take nine months. Pfizer would issue nearly 15.9 million new shares to Wyeth India shareholders as part of the merger deal.

(This article was published on November 25, 2013)
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