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In a letter from the SEC, dated May 9 but filed on October 5, a clarification was sought on how Pfizer (NYSE:PFE) secured an overseas EBT figure of $15b, with revenues of $26.9b, and a loss of $2.2b in the U.S., with revenues of $40.5b. "The operating results appear to be inconsistent with your domestic and international revenues," wrote the SEC's senior assistant chief accountant. Pfizer has the second largest amount of profits ($63 million) kept overseas, for a U.S. company, followed only by General Electric Co (NYSE:GE). Companies keep their profits overseas to reduce their effective tax rates. Pfizer's 2012 second quarter U.S. revenues were 37% of total revenues.

By designating profits as overseas earnings, the company cut its tax rate by 9.4% in 2009 and by 3.3% in 2011. Pfizer, in its response, posited that further dissemination of information pertaining to the distribution of its earnings would not add value for investors. Its controller made it a point to add that the geographical mix of revenues was not a good indicator of the split between domestic and international pretax earnings for purposes of financial statement presentation, especially for a multinational company that manages its operations on a global basis. The company, however, promised to add a disclosure, affirming that the jurisdictional location of earnings is a significant component of the effective tax. And that was it; the SEC responded that it does not have any further comments.

Pfizer is not alone in raising the SEC's suspicion. Google Inc. (NASDAQ:GOOG) similarly received questions from the commission last year regarding its earnings in other countries, which reduce its tax expense. Just like it did with Pfizer, the regulator asked the search engine giant to add more details in its disclosures showing how the higher proportion of earnings attributed to overseas, reduced its tax bill. After Google had responded, the SEC, much like in PFE's case, did not have any further concerns.

Valuations:

 

 

PFE

GlaxoSmithKline (NYSE:GSK)

Johnson & Johnson (NYSE:JNJ)

Merck (NYSE:MRK)

Novartis (NYSE:NVS)

Avg.

Forward P/E

11x

10.5x

13x

12.5x

12x

12x

Dividend Yield

3.45%

4.82%

3.5%

3.62%

3.96%

 

L.T Growth Rate

2.12%

5%

7%

4.7%

1.35%

 

The stock currently trades at 11x its forward 2013 earnings, with a yield of 3.45%. The analyst mean price target is $27. We continue to take a positive stance on Pfizer's outlook. Given its strategic planning, strong financial position and encouraging cash flows, we recommend the dividend-paying stock as a buy. As far as the issue raised by the SEC is concerned, we do not consider it to be a setback for the company and do not expect any impact on the price. The SEC has raised such concerns before, as was the case with Google, without there being many implications for the stock in question.

Source: Pfizer Won't Get A Slap On The Wrist From The SEC