Goldman Sachs reinstated coverage of Pfizer Inc with a buy rating and added the stock to the conviction buy list, saying the world's biggest drugmaker was severely undervalued after its proposed acquisition of smaller rival Wyeth.

Pfizer has been punished mainly due to the 50 percent dividend cut associated with the Wyeth deal and the market's wariness of large-scale Pharma M&A, the brokerage said in a note to clients.

However, with the deal, Pfizer is set for stable earnings through 2015 as one of the strongest players in vaccines and biologicals, said the brokerage, which has a price target of $17 on Pfizer shares.

We believe there is now minimal risk, if any, for further cuts to the dividend through the next decade, given the strong and steady level of cash flows from the combined companies, the brokerage said.

With significant free cash flows and stable earnings, Pfizer could comfortably raise the dividend and/or buy back shares while it continues to pay down debt, Goldman said.

The brokerage expects Pfizer to raise dividend by 20 percent in both 2011 and 2012 and 10 percent in 2013.

In January, Pfizer said it would halve its dividend and raise $22 billion in debt to buy Wyeth for $68 billion in an acquisition aimed at softening the blow of losing its biggest product to generic competition. [ID:nN26367941]

Pfizer shares have shed 28 percent of their value since the deal was announced.

Pfizer shares have performed so poorly post-deal-announcement that, in our view, merely closing the deal and meeting minimal earnings and financial expectations should be sufficient to drive the shares back to the $17 level, the brokerage said.

Shares of Pfizer were flat at $12.50 Thursday on the New York Stock Exchange. (Reporting by Mary Meyase in Bangalore; Editing by Himani Sarkar)