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4 Reasons I'm Selling Abbott Labs in 2012

April 29, 2012 | About:
Micah Martin

Micah Martin

10 followers
Abbott Laboratories (ABT) is, as far as I can tell, a wonderful company and has accomplished significant feats in the past- both for world health and for its shareholders. It is a widely held dividend aristocrat, and is respected across both the investment and medical communities. I personally see Abbott’s nutritional products on grocery store shelves in China, and have definitely benefited as a shareholder during the past 14+ months I have held the stock.

That said, there are four reasons why I am planning on selling my Abbott stock, and all four are related to the October 19, 2011 announcement regarding Abbott’s decision to divide their company into two companies- one a pure pharmaceutical company with $18 billion in annual sales, and the other a company producing nutritional products, medical devices, and generic drugs with $22 billion in annual sales.

1. The first reason is personal. Owning a stock means owning a business, and I don’t actually want to own two separate companies in place of the current Abbott. When I purchased Abbott, one of the qualitative effects I liked about the company was the combination of steady emerging markets growth (singles/doubles) of the nutrition/medical devices business with the more variable (home-run) pharmaceutical business. I liked the in-house balance and financial strength that came with having both companies under one roof. (That’s partly why I still own PepsiCo; I like the balance between their beverages and chips, and the financial strength that supports both.) Now that Abbott is splitting into two, I am unable to have that balance in a single company and I believe risks will increase.

2. The second is practical. I only purchased a small amount of shares in February 2011. While studying and following companies is something I truly love, it isn’t worth it for me to now closely follow two separate companies- their 10-Q’s, 10-K’s, etcs- instead of one, especially when my minor amount of Abbott shares becomes two even smaller amounts of shares. (If I were thrilled about each company on its own merits, it would be a different story.) It’s a simple reason, but I think it’s wise to understand one’s time limits/priorities in investing.

3. The third is observational. Since the announcement of the company split, and the corresponding rise in price, insiders have been selling significantly. Insider selling is not necessarily a reason for individual investors to sell a stock, as insiders, like everyone else, need cash at different times, and also sometimes desire to diversify their investments. That said, it’s worth paying attention to insider selling in a situation like this.

In the case of Abbott, insiders have sold 35% of all insider-held shares during the past 6 months (according to Yahoo finance). That’s roughly 1.2 million shares. There have been no insider purchases. That makes me even more skeptical about the split “unlocking shareholder value”. If splitting up Abbott into two will truly unlock shareholder value, why are the insiders tripping over themselves to sell? Shouldn’t they be buying, or, at the very least, holding their stock until the shareholder value is “unlocked?” Or was merely the announcement of splitting Abbott meant to unlock the shareholder value?

4. The fourth reason is debatable. At this point in my life, I have a critical eye towards splitting up companies to “unlock shareholder value”. I believe that over a 10-20+ year time horizon, value and operational strength will inevitably be made evident. I don’t think that a Berkshire Hathaway or a Leucadia or a GE should split off all of their businesses to convince Wall Street that the parts are worth more than the current sum of the whole. In time (sometimes a long time, I grant you that), operational excellence wins out.

Here are the reasons for the split that CEO Miles White gave in his 2011 letter to shareholders (emphasis mine):

“These changes in the environment essentially led each business to pursue distinctly different business models. Today, research-based pharmaceutical products have different approval and life cycles, research and development profiles, regulatory environments and geographical market than our other businesses.

As a result, these two halves of today’s Abbott have moved in very different directions with equally different demands and priorities and are already functioning as separate, highly successful businesses. Acknowledging this, with the creation of two independent companies, helps clarify for investors each business’ value, which we believe will be beneficial for both companies and both stocks.

In making this decision, we challenged ourselves to think beyond our established and successful model to create the optimal pharmaceutical and medical products companies for the conditions of the 21st century. Because of the ways in which investors value these two different models, and because of their varying capital and investment needs, we concluded that we would be even more successful in the years ahead as two companies rather than one.”

A major reason stated for the split is to “clarify for investors each business’ value.” Honestly, I don’t think that’s a valid reason for splitting Abbott into two, and frankly it makes me unsettled with leadership. Instead of worrying about what Wall Street thinks, management should focus on their business.

Warren Buffett says that “time is the friend of the wonderful business” and Abbott has been a wonderful business for decades. I am certain there are times when a company should split apart, but have a hard time understanding why now is the time for Abbott to:

-incur millions of dollars of investment banking charges

-pay significant organizational charges while performing the split

-rid themselves of any current organizational synergies shared by the single company

-pay two executive teams and two boards of directors, with stock options for all

-weaken the overall financial condition of both firms and quite possibly lower ABT’s debt rating

I’m sure there are reasons for their upcoming split (unless someone in charge had reasons, it wouldn’t be happening), but none of the reasons I have read seem significant enough to spend millions of company dollars to obtain. Abbott is paying a lot of money and spending a lot of managerial effort to “fix” the stock price, instead of using that money in other, more concretely beneficial company uses. Wall Street is fickle, and I sincerely doubt that millions spent to please analysts is as strong an investment as buying back shares or additional dividends would be.

Instead of splitting, I would have preferred Abbott ignoring Wall Street, allowing its stock price to remain low, keeping its dividend growing and focusing on its operating business, thereby allowing me to purchase more shares at a lower price.

When I originally purchased Abbott, I was planning on holding it indefinitely and adding shares on dips over the course of time, all while collecting the steady dividend. I am disappointed to sell, but do plan on selling my Abbott shares sometime this year before the companies split.

The majority of gurus have been selling Abbott lately, as well. There are currently 17 gurus holding ABT, and of the 17, 12 have been reducing, 2 holding, and 3 adding.

Disclosure: I currently hold shares of ABT, but plan to sell them in 2012. Also, I am long PEP and BRK.B.


Rating: 3.3/5 (28 votes)

Comments

appooj
Appooj - 2 years ago
I completely agree. Had been buying ABT shares from May to August 2011 with an intent to hold for a long long time and collect the dividend. One of my reasons for purchasing it had to do with the fact that the diversification added an element of safety to a pharmaceutical portfolio that is prone to boom and bust scenarios. In view of the announcement regarding the split, I have sold half my position already and am looking to get out completely. Am up some 15% plus dividend payments. Glad to see your position as I was wondering why everyone else seemed so happy with the plan to split the company and that it would "unlock value". Like that you're long BRK.B

Micah Martin
Micah Martin - 2 years ago
Glad to read that you agree, Appooj! That makes (at least) two of us wondering why everyone was so happy about the company split... Thanks for your comment.
sjzhao2003
Sjzhao2003 - 2 years ago
Hi, Micah! I agree with most your reasoning, especially your last point. Corporate split-up seems to have become a corporate bandwagon for "unlocking shareholder value," just as share buybacks have become. Many companies may be splitting up their businesses for no valid reasons, kowtowing to activist "investors" who care more about a short-term pop in the share price than the long-term success of the underlying businesses. In that regard, I respect PEP's board for not splitting up their businesses.

I sold my small position in ABT for a somewhat different reason: there are better values than ABT, given its product risk and reimbursement risk.

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