Friday, January 25, 2013

Reconsidering Abbott Labs (ABT) And AbbVie (ABBV)

Abbott Laboratories: A company I loved 

At the beginning of this year, Abbott Laboratories (ABT) completed the spin-off of its branded pharmaceutical business. This business is now a separate publicly traded company, calling itself AbbVie Inc. (ABBV). I have long been a fan of Abbott Laboratories as a diversified health care company with operations in medical devices, diagnostics, branded pharmaceuticals and nutrition among other businesses. It's been in business since 1888 and it's been increasing its dividends for 40 years. Think about this: Abbott has paid 352 consecutive quarterly dividend payments since 1924! Before the company split, it was attractively valued, yielding over 3% and had an attractive balance sheet. Earnings had been growing at a healthy clip for as far back as I could track. There just wasn't much to dislike here. It was one of my largest positions, and rightfully so.

It was because of my extremely favorable view on the business that I had fully anticipated keeping both sides of the business after the spin-off. I knew that Abbott Laboratories (ABT) would keep most of the highly attractive portions of the business and AbbVie (ABBV) would go off and maximize the drug and pipeline side. The company felt the different sides of the business could operate more efficiently separated and the market would reward the move through a more appropriate (higher) valuation on the separate businesses. I was inclined to agree.


The split 

However, now that I have the two companies in my portfolio I have to look at them as they are: two separate companies. I can no longer wax nostalgic about the old Abbott Laboratories and what a fantastic company it was. Those days are gone and there are now two different companies in its place.

The new Abbott Labs (ABT) 

The new Abbott Laboratories (ABT) keeps everything but the proprietary pharmaceutical business. This includes nutritional products, diagnostics, medical devices and established pharmaceuticals (branded generics). This is really, in my opinion, the more attractive side of the old business. I think there is plenty of growth here, and the company has always been outstandingly managed. 70% of sales are outside the U.S. due to their exceptional geographical diversification, with a full 40% coming from emerging markets like China, India and Brazil. The main problem with the new ABT is that the yield is a lowly 1.71%. This is far below what I'd consider an acceptable yield for a new investment.

Basically, if I were looking for an investment with "new money", or fresh capital, ABT would not really be in the running due to the extremely low yield. I look for 3% when I can get it, but generally 2.5% is about as low as I go. What's important to consider is that whether this is a new investment with fresh capital or an old investment matters not, as I'm still yielding 1.71% on the capital invested with the new ABT. Unfortunately, that's not something I'm totally comfortable with.

A new company: Abbvie Inc. (ABBV) 

The newly formed spin-off business now known as AbbVie Inc. (ABBV) is a research-based pharmaceutical company. The great thing with ABBV is that since they were spun-off from a well-known and mature pharmaceutical side of a large company in ABT, they already have a large stable of successful drugs and a strong pipeline behind that. It currently yields 4.39%. What's not to like? Well, actually quite a bit. The major problem with ABBV is that one particular blockbuster drug, Humira, accounts for 50% of their revenue. Humira is an absolute stunner of a drug, one that's been incredibly successful for Abbott Labs. It is mainly used to treat rheumatoid arthritis and is the world's best selling autoimmune drug.

But the success that ABBV has out of the gate with a gigantic drug like this could also be its greatest weakness. AbbVie faces a patent cliff with Humira at the end of 2016, so the pipeline needs to be cooking right now to make up for what will probably be relatively large revenue losses. While Humira sales won't go away completely just because it goes off patent, this will cause large sales disruptions. There doesn't appear to be anything of blockbuster status in the pipeline currently. Great yield with this company, but I don't generally invest with pure play pharmaceutical companies in general due to patent cliffs and other inherent issues with these businesses. You'll notice I don't currently hold positions in companies like Pfizer Inc. (PFE) or Eli Lilly & Co. (LLY). ABBV could be particularly risky due to the large amount of revenue it counts on from one specific drug.

Where I stand now 

I haven't decided to sell off my two separate positions yet, but am considering it currently. I was absolutely enamored with Abbott Laboratories (ABT) of old, and it was one of my favorite companies to buy on dips. It was a perennially undervalued company (before the spin-off announcement) with a great yield and solid operations. Looking at the two new companies as separate, individual components I just don't see the same level of attractiveness or quality. Frankly, I wish ABT would have stayed whole as one company. I now have one high quality, diversified health care company with a yield that's way too low for my comfort zone and one research-based pharmaceutical pure play that has half of its revenue coming from one drug. It's unfortunate that I find myself in this situation. I may have to sell both sides and redeploy my capital into another opportunity that I find more compelling.

What do you think? Are you keeping both companies? Selling both? Keeping one? Why?

Full Disclosure: Long ABT, ABBV 

Thanks for reading.

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6 comments:

  1. "What's important to consider is that whether this is a new investment with fresh capital or an old investment matters not, as I'm still yielding 1.71% on the capital invested with the new ABT."
    -------------------------------
    Am I misunderstanding, or are you saying that you disregard your actual cost basis in computing the current dividend yield on your investments and instead consider your yield to be whatever it is at the current price of the stock? I've also owned ABT stock for several years, and I'm of the opinion that my post-split cost basis of $22.57 works out to a dividend rate of 2.48% on the .56 dividend. The 1.71% rate which a person who purchases the stock at today's price would receive is irrelevant to me in figuring my ROC.

    ReplyDelete
    Replies
    1. dizzy7,

      Thanks for commenting.

      You're factoring in your YOC. Regardless of my yield on cost, the capital that's currently invested with ABT will still only be yielding the actual 1.71% that the stock provides through dividends.

      If you have $2k currently invested with ABT (whether a new investment or not) you're still only going to be receiving 1.71% on that $2k. If you sell your entire ABT position (as I did recently) and take that $2k and invest it JNJ you'll be receiving 3.30% on your $2k. That's an increase in income.

      YOC is something I look at it, and it does make me feel warm and fuzzy inside, but in the end the current yield is what I'm receiving on my current capital. A high YOC typically means you've held a while and experienced some nice capital gains. Nothing wrong with that, but it's important to remember that the current yield is what you'll be actually receiving on your actual capital invested with a company.

      Hope that helps.

      Best wishes!

      Delete
    2. Dividend Mantra,

      Thanks for your reply.

      You're right, I do use YOC in calculating the dividend rate of return on my investments and I'm inclined to think that's what most dividend investors do.

      To follow up on the example you gave, if I had purchased the stock for $1000 at some time in the past, and the current dividend is $40 and the current value at today's stock price is $2000, I would calculate that i was earning a YOC of 4% on my investment and also had a potential $1000 capital gain. In the same situation, if I understand you correctly, you would calculate that you were earning 2% on your investment because you would use the current price and adjust your invested capital to $2000 from the $1000 you had actually paid for the stock. By the same token, I assume you would calculate your dividend yield to be 8% if the current value of the stock fell to $500. To me, disregarding what I actually paid for a stock when I bought it and assuming that the capital I have invested is whatever the value of the stock is today is not something I'd be comfortable doing, but I appreciate your explanation of how you handle it and am glad it works for you.

      Delete
  2. I agree with dizzy. With a cost per share basis in the old ABT of $14 and a yield on cost (I bought in 1992) of over 10% I will keep both. Current dividend yield on both combined is over 6%. Company has excellent managment in the past and those managers are still employed. I'll keep all and take my chances. Linear thinking can have drawbacks.

    ReplyDelete
  3. I sold my positions in both companies. Time will tell if the spinoff is good for investors. In the mean time, there are better alternative opportunities that carry less uncertainty for me.

    ReplyDelete
  4. I sold my positions in both companies. Time will tell if the spinoff is good for investors. In the mean time, there are better alternative opportunities that carry less uncertainty for me.

    ReplyDelete

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