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Abbott Laboratories (ABT) Is Splitting

October 24, 2011 | About:
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.

About the author:

Dividend Mantra
Trying to retire by 40 by investing in dividend growth stocks and living frugally, valuing time over money.

Visit Dividend Mantra's Website


Rating: 3.2/5 (9 votes)

Comments

JeanPierreSarti
JeanPierreSarti - 2 years ago
I also own ABT and share your thoughts. For now it is obviously a wait and see until something actually happens. Ideally the non-pharma piece will keep the dividend income that we come to expect as that part of the company is more predictable. ABT is so widely held, like JNJ, I really would be surprised if they messed with a good thing.

Except for JNJ, I tend to stay away from pharma companies for the sole reason that I don't completely trust the whole patent / litigation game of brand name drugs in this country. One day you are printing money and the next day you are being sued for billions. Not a situation for me....
LisaLL
LisaLL - 2 years ago


way overdue
kengolub
Kengolub - 2 years ago
I've been long ABT for many years, quietly sitting on my gains while collecting those dividends. It's a boring stock, profitably boring, but it does move occasionally, and one day when I grow up, it will hit a high and I may sell it and move on. Now they've broken the boredom and made me quite unhappy.

My problem is that ABT is employing a gimmick to catch the attention of Wall St. traders, who don't have an attention span of 7 days anyway. This split will destroy some in-house synergies, create two smaller cos. with more overhead, all for the sake of a few moments in the spotlight. Many some of the top execs will get a chance to exercise their options sooner. Fine thanks I get for being a patient, undemanding value investor.

I'd much rather own a co. that concentrates on its operating business, not one that dances jigs to get attention on Wall St.

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