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Pharmaceuticals Are Not Safe, Defensive Plays

Tuesday, 10 Jun 2008 | 4:43 PM ET

This was a day that started out with inflation as the new global concern:

--ECB hawkish

--Fed talking tough on inflation

--Bank of Canada did not ease, when it was expected to do so

--Inflation worries roil Vietnam, that country's stock market hits a two-year low; China's Shanghai index also hits a new low

The dollar rallied as the Fed talked tough on inflation. That hurt commodity stocks like energy and materials. Financials, which have been down 5 days in a row, staged a modest but unenthusiastic rally. Big pharmaceutical stocks like Merck, Pfizer, Sanofi,and Bristol Meyershit new lows, as the world has now discovered that these are no longer safe, defensive plays.

Everyone talking about Pfizer's huge 7.1 percent dividend yield, which gets bigger every day because the stock keeps dropping. Is it safe? The $1.28 a share dividend liability costs them about $9 billion a year; even with Lipitor going off patent in 2010, Deutsche Bank estimates they will still generate $14 b in cash flow, enough to fund the dividend, even if they have to repatriate some of the sizeable amounts of cash that are parked overseas.

But let's face it folks. There are a lot of people who own Pfizer just for the dividend, and the stock is trading like they are going to cut the dividend, cash flow or not.


Questions? Comments? tradertalk@cnbc.com

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