Abbott Laboratories (ABT) Is Splitting

Although this is probably news to few readers, Abbott Laboratories (ABT) has surprisingly announced plans to split into two separate companies. The first company, which will retain the Abbott Laboratories name, will keep the businesses in nutritional formula, medical products and generic drugs among other businesses. The second company, yet to be named, will focus on the research-based pharmaceuticals. Management seems to think that it’s best to split the two businesses, as this will give investors more clarity on investment choices and also unlock shareholder value.

The main question becomes: is this a good move? What do you think? Any fellow ABT shareholders out there want to sound off?

I can see some benefits and some drawbacks here.


Benefits:

Management is obviously convinced that the share price, which has essentially been flat over the last 10 years, has unlocked value behind it and that splitting the company will release this unlocked value. I agree that shares are undervalued, and it seems that most analysts agree. Morningstar has rated ABT as a 5/5 star value for as long as I can remember tracking ABT. Many articles on Seeking Alpha talk about the undervaluation of ABT, and have been talking about such for quite a while now. I think that splitting the company may very well increase total value by appropriately pricing out two separate companies. I think, however, that this is simply doing something that was going to happen anyway. Everything always reverts to the mean, and eventually ABT was going to as well. I actually like that ABT is undervalued, as it gives me a chance to buy shares at an attractive price. If the share price skyrockets, it prices me out as a value investor. This move may unlock value quicker than what the market otherwise would have.

It gives investors choice. As a current ABT shareholder, I’m investing in a diversified health care company. One thing weighing on ABT shares has been the blockbuster sales of Humira, the anti-inflammatory drug, and the lack of an heir apparent in the pipeline. Humira has accounted for 1/5 of the company’s total sales, and while growth with Humira has been terrific, there doesn’t appear to be anything in the pipeline to fill in the gap once the patent expires in 2016. Once the pharmaceutical company splits, you can choose to keep this investment or seek out opportunities elsewhere. This will be a pure pharma play, however and because of such patent expiration and litigation are omnipresent risks.

Drawbacks:

The main drawback I see is the reasons I first invested with ABT will be gone. I like the fact that it seemed to be undervalued on a fundamental basis. It’s a diversified health care play, with the riskier pharmaceutical division growing leaps and bounds with Humira, and the more conservative core business of selling formula, heart stents and generic drugs. With the company splitting, it will no longer be one diversified health care company. It will be two separate companies, with one retaining the core businesses that are more conservative, and the other businesses focusing on the research-based pharmaceuticals. Also, if this move does “unlock shareholder value” it will no longer be undervalued and no longer be a compelling investment move.

One further drawback is the consideration of dividends. ABT has been, traditionally, a wonderful dividend growth stock. It currently sports a solid entry dividend yield of 3.6% with a 39 years of dividend growth behind it. It has a 10-year dividend growth rate of 8.8%, which is fairly conservative but reliable. Will the two companies retain the culture of dividend growth? That remains to be seen. Management has stated that the two companies combined will continue to pay out the current dividend that ABT as a whole has promised. That, as of this writing, is $0.48 quarterly per share. So, there will be no loss of income right away. But, will the income raises keep coming as reliable as ABT in the past was known for? There appears to be some doubt about this, but it’s all very hard to say as this split isn’t scheduled until the end of 2012.

Intently Observing

I’m carefully watching ABT. I’m actually saddened about this move as I invested in ABT as a diversified health care company, and this will be no more after the split. It seems to me that company splits are all the rage right now. ConocoPhillips already announced a split of upstream and downstream operations to be commenced in early 2012 and there were rumors circulating of a split of PepsiCo’s beverage brands from the snack food business. I think that if a company is overweight and certain sectors are weighing it down then it makes sense to lose the offending sectors. I just don’t see how this is a good move for shareholders long-term. I’m not the smartest guy around, so I could be drastically wrong. For now, I’m still long ABT.

I’m very interested in your opinions? For anyone who has or hasn’t invested in ABT, what are your thoughts? Are you selling? Are you hoping the culture of dividend growth stays with both companies? Please let me know.

Thanks for reading.

Comments

  1. says

    I have a decent position in ABT. The split is a good idea, but it’s way too early. I wish they announced this 5-10 years from now.

    Perhaps investors are losing patience with the stock’s performance. ABT’s stock price has been flat over the last 5 years.

    If the board approves the split, I’ll keep both companies. The medical device/nutritional division will continue to do fine. I’m bullish on the pharma division because they have a strong pipeline worth potentially billions in revenue. And once Humira goes off patent, it’s not likely for revenues to decline to zero instantly. Generic drug makers still have to discover ways to replicate the drug, which I heard was pretty hard to duplicate.

  2. says

    Henry,

    ABT has been flat for a long time, that’s for sure. I’ve been generally ok with it being flat and buying on the dips, especially when it comes down to the $45 level. The undervalued shares give me an opportunity to reinvest my dividends into more shares. Obviously, not everyone (especially management) is as enthusiastic about the shares remaining undervalued for this long.

    I’ll likely hold my ABT position steady, but I am certainly watching more carefully than I was before. We’ll see what details are released when the split date becomes closer next year.

    Thanks for stopping by!

  3. says

    Hey DM,

    I feel like I may hold for a while because I don’t have any pure pharma plays-why not take a chance with the new Abbot spin-off. At least for now.

    Can we please gloat for a second about Aflac though? Just raised the dividend 10%, profits, earnings, up…this is exactly what I expected from the company & I am thrilled.

    Best wishes,

    Joe

  4. says

    Joe,

    I’m a bit mixed on ABT. I think it’s been such a solid company for so long that I can’t imagine it letting me down. On the other hand, it’s that kind of mindset that gets an investor into trouble; falling in love with a company. We’ll see. I may hold. I don’t think I’ll add to my position, even though it was very high on my list for my next round of buys. That may change though, as well. We’ll see.

    Aflac. Wow. I went in fairly big for my portfolio size, with two large purchases. I just felt that it was SCREAMING to be bought when it was down in the lower $30′s. I think you got in even lower than I did, if I remember correctly. I’m glad I made the move on that one. I bought, then averaged down again. I am just as thrilled as you!!

    On your pure pharma comment, you were long TEVA if I remember correctly. That’s a pretty solid pharma play, unless you sold? I’ve looked at TEVA a few times lately and will be talking about them on The Div-Net tomorrow.

    Take care buddy!

  5. says

    Hey bro,

    Yeah, I was just so excited to talk about the AFL, I didn’t put a crazy amount of thought into my comment, in fact I typed it from my phone. Thanks for addressing some of the factors, that is very sharp of you.

    First off, I did buy a bit of AFL in the low 30s… but also some in the mid 50s:) and in the mid forties and finally in the low 30s. Talk about averaging down; I did just that in the past year. It served me very well and I’m so happy with the outcome.

    As for pharma, you are correct…I am very long TEVA. Haven’t sold a bit. “Pure pharma” to me are your glaxos and pfizers and astrazenecas. They all strike me as really weak because of their patent expiries. They need to constantly be scurrying around trying to update their meds, it’s hilarious. I mean why make a second version of heartburn medication when the one from last year works perfectly.
    I recall reading in Bloomberg about how Pfizer was saying that in the next couple of years, they have many brands patents expiring.
    And guess who is waiting patiently in the wings? Teva (and other generic companies, of course)! So Teva strikes me as more than just pure pharma, they have flexibility that the others don’t have (unless the companies themselves also offer generic brands, and some of them do).

    So yeah that’s my long winded reflection…I will say this though. ABT is only 2.7% of my total portfolio, so I feel like I can afford to “gamble” a little with keeping the stock and seeing what happens and how it pans out. Whereas I recall reading that it makes up a larger part of your portfolio. So everyone’s situation is a little different.

    Anyway, nothing like getting those dividend raises…Keep it up and I’ll look forward to reading your further output.

    Joe

  6. says

    Joe,

    Great moves on AFL. I bought in as big as possible and moved quickly. It sounds like we both made a great decision on that one. Even if it was still in the $30′s I’d be confident about my decision to go long on AFL.

    I hear you on the pharma plays. I think TEVA is still a pretty solid buy right now, but I liked it better in the mid-$30′s. Seems like a solid long-term bet, but the sacrifice has to be made on the yield. They are very well positioned in the generic market.

    Maybe I’ll stick with ABT. You’ve never steered me wrong. Are you going to be buying any more shares or staying pat? ABT was actually on my short list for my next buy, but I’m not sure now.

    Take care Joe.

  7. says

    DM,

    I am a huge fan. You have really inspired me to live a little more frugally, I appreciate that. Just wanted to say that.

    Ok, like I said, everyone’s situation is different…For me, ABT is only a small percentage of my whole portfolio. I have put some thought into it regarding your situation, and excuse me if I’m overstepping my bounds here, but after all you choose to put your situation out there in a public forum so why not, I’ll give you my opinion…And you asked:)

    I think that because your goal is to live primarily off of your dividends in 10 years, maybe more diversification is in order. A huge risk you will encounter in living off of your dividends in 10 years is if one of your companies somehow modifies or (heaven forfend) stops paying dividends.

    Being that that is your situation as I see it, I would recommend not buying any more ABT and only focusing on other companies so as to achieve a more diversified income stream. On looking at your list of companies, there are some fabulous ones you don’t have yet…CL, CLX, LOW, KMR/KMI, the mighty MDT, among others…Some of these may not look that impressive now, but their yield-on-cost in 10 years hopefully will be quite impressive. Quite possibly paying you a higher yield on cost per share, in 10 years, than KO would (MDT and LOW in particular, based on their historical div growth).

    That’s my unsolicited…As for me I don’t really know if I would buy any more ABT yet…I don’t have NUE, NSRGY, or RBGPY yet and I have a hankerin…Or I might buy more ABT down the line and sell the new pharma company when it splits…I don’t really know. Why not buy MDT instead of ABT for the time being?:)

    I believe you mentioned that you wanted to diversify your portfolio more in the past, so I’m probably preaching to the choir. But MDT and/or BDX might be nice for you to look at instead of ABT, until we get more clarity on ABT and it’s new pharma company’s dividend policy. Of course MDT and BDX are a little pricey as of today (BDX more so)…But if I saw MDT in the low 30′s, I’d probably pounce. That’s some healthy growth for the future, amigo. A good rocket for the engine. Take a look at MDT’s 10 year div growth.

    I think this coming decade will be a fantastic decade for dividend growth investors. The volatility will help us get some good deals.

    Look, I’m not dissing ABT, and they may end up being just fine for the next 50 years. Good international presence. Why not diversify more in the next year or 2 though? That way you position yourself for more div growth in a decade, with higher yield on cost then. And more peace of mind via diversification.

    That’s the beauty of investing, it’s a personal journey, we all have our quirks and personalities!
    Keep writing…Very inspiring, your frugality.

    Joe

  8. says

    Joe,

    Thanks for the response. I really appreciate your insight and ideas. I’m really glad that you find my frugality inspiring. I guess I’ll continue to inspire you through cheap living, and you can continue to provide me great investment ideas! :)

    Thanks for all the ideas. I actually emailed you over at SA asking you about what you were looking at, so I guess you can just disregard that email.

    I do want to diversify further and the more experience I gain in investing the more I want to own many companies from which to spread out my income stream. The wider the stream, the less likely one company’s missteps will affect me. When I first started I figured 20-25 companies would be great. Now that I near 20, I feel that 30-40 would probably be better. If you’re all about seeking outsized gains, then you’ll likely want to concentrate your bets. I’m not looking for outsized gains, I’m simply looking for a rock-solid income stream that outpaces inflation over time.

    I actually mentioned BDX and MDT in my email. I think they are both solid buys, but as you mention they have both been bid up a bit right now. Solid long-term health care plays though. TEVA also looks good in this space. I tend to agree with you on ABT, as I already own a relatively sizable position relative to my small portfolio. I’ve looked at NUE, but a bit cyclical for my tastes. There are quite a few fans of that business for exposure to steel. CL seems a bit pricey, especially with a 15.0 price/book. Great business though.

    I’m looking strongly at some industrial stocks. RTN, GD and to a lesser degree LMT and UTX are all on my radar right now. I think RTN and GD look like solid values even with the market run-up. LMT is a bit scary with the debt, price/book and unfunded pension issues, but the yield is nice. UTX looks a little pricey, so less likely I’ll go in that direction.

    I think I’ll follow your ideas on ABT. I’ll likely stay pat with my position.

    Thanks so much for your comments. I really appreciate your thoughts!

    Best wishes!

  9. says

    Healthcare stocks have been out of favor for a long time. But healthcare is still the fastest growing part of the economy and will continue to be going forward. So I would say buying a stock like Abbott Laboratories is an excellent stock pick.

  10. says

    Really do not know what to do. May be keeping the pharma after the split is done ? Bouhgt it on 2nd Oct and am now 8% down, ok, I will be patient. I have Teva also. The problem with me is that my bank charges me 1,5 % on a buy and 1,5 % on a sell ! This is 3 % for a trip ! Not counting the custody fees ! This is huge ! And probably a perfect recipe for disaster ? Could you give me your opinion if it is best for me to buy a Vanguard Dividend Growth Income Fund (VDIGX) or an equivalent ? I just read the little book of common sense investing from John C Bogle which changed my way of looking at how to invest, just as you did. I really appreciate your posts. Thanks !

    • says

      Aspenhawk,

      I’m sorry to hear about the high transaction costs you’re dealing with. That definitely makes it difficult to enter and exit positions quickly, so I suppose that just reinforces the fact that you should be investing for the long-term.

      Being down on ABT so much so quickly is unfortunate, but the question that you should be asking yourself is whether or not you believe in the company for the long haul. If you don’t, you should have never invested in the first place, But if you do, as I believe you do, then you shouldn’t worry about short-term market fluctuations, but rather focus on the business and its operations going forward. Only should business operations and fundamentals influence your decisions of buying and selling. In fact, a 8% drop would probably lead me to want to purchase more shares and average down on my position.

      As far as index investing I am probably not the best person to ask. I don’t invest in index funds for a variety of reasons, but that doesn’t make it a bad idea. In fact, index investing can be a phenomenal way to invest. It all depends on your risk profile, strategy and how much time you’re willing to spend on your investments.

      Best wishes!

  11. Anonymous says

    DM, Now that the split is over, can you give your perspective on owning ABT and ABBV (the two new companies)? From dividend growth investing perspective, should one sell ABBV and just keep ABT, or keep both?

    • says

      Anonymous,

      I’m keeping both for now. It’s hard to say what will happen from here, but ABT has been a great company for a long time and I don’t see why that would all of the sudden stop.

      Besides, splits like this usually work out well for investors. Just look at the recent COP split.

      The thing I’ll be keeping my eye on is dividend growth from both companies. Obviously ABT has a low yield right now, so the growth will have to make up for some of this. ABBV can get by with a lower growth rate.

      Best wishes!

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