During Pfizer’s third-quarter conference call on Oct. 31, several analysts asked the company’s executives to speculate about what they would do if a business-friendly tax reform package were to pass in Congress. CFO Frank D’Amelio largely dodged the question, saying only that the company’s capital-allocation priorities wouldn’t change—and that those priorities would include dividends and share buybacks.
Pfizer is making good on that promise. On Monday, the company announced it is hiking its quarterly dividend rate 6% to 34 cents per share. The company’s board also authorized $10 billion in share buybacks, which it will add to the $6.4 billion in buybacks it had already green-lighted.
President Donald Trump has long trumpeted the idea that slashing the corporate tax rate would spur job growth. But if Pfizer is any indication, hiring is likely fairly low down on the priority list for Big Pharma. As is often the case when companies are facing the prospect of having a lot more cash on the books than they were anticipating, drugmakers are under pressure to spread the wealth to their investors—and to make strategic decisions that could boost their top and bottom lines in the long run.
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Or, as Credit Suisse analysts put it in a note to investors on Tuesday: “The likely passage of U.S. corporate tax reform should help to drive repatriation of funds from overseas and lead to an increase in M&A activity in the space, boosting the growth outlook for large cap companies and increasing investor interest in companies of all cap sizes that could be potential targets.”
Pfizer is well positioned to make the most of tax reform. A JP Morgan analyst on Pfizer’s recent earnings call pointed out that the company is holding $160 billion in foreign earnings and that repatriating that money could allow it “to bring back significant future earnings to the U.S. at a very low tax rate.” He asked if that might end up “fundamentally altering” Pfizer’s approach to capital deployment.
D’Amelio responded by reminding investors that it’s not all accumulated cash, but that in any case, it wouldn’t change the company’s priorities. In addition to dividends and share buybacks, those priorities are likely to include M&A, D’Amelio noted. That’s no surprise: Pfizer is often cited as a likely acquirer, with rumors circulating most recently that it could pick up Bristol-Myers Squibb. In the past, the company cited uncertainty about tax reform as its reason for delaying big deals. But with the corporate tax rate coming down to 21%, a lot of that uncertainty is gone.
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As for repatriation, Trump didn’t quite get the 10% tax rate he wanted, but it’s still not a bad deal for companies like Pfizer. The current version of the bill brings the one-time tax rate for repatriating overseas cash down from 35% to 15.5%.
With the dividend hike and repurchase program checked off, Pfizer can start strategizing around M&A. Credit Suisse analysts predicted in today’s note that the company’s focus “will likely remain on strategic options the company could pursue but are harder for us to anticipate.”
One move that everyone is anticipating, however, is an offloading of Pfizer’s consumer health business. During the company’s third-quarter call, CEO Ian Read said all options are on the table, including an asset swap or a spinoff, “depending on how we create maximum value.” Among the names bandied about as potential acquirers are GlaxoSmithKline and Reckitt Benckiser. Analysts estimate that the consumer business, which holds such brands as Advil and Centrum, could be worth as much as $14 billion.