In October 2011, Abbott Laboratories announced plans to complete a tax-free spin-off of its pharmaceutical business to shareholders by the end of 2012. Corporations with diversified businesses often choose to spin off a business entity which would command a higher stock market valuation when separated from the larger corporation. This strategy presumably enhances shareholder value by giving the shareholder a higher total stock market value than they had prior to the spin-off. There is no guarantee that a spin-off will result in a higher total valuation for the shareholder, but corporations would not take this approach if it didn’t generally work out well for shareholders.
Abbott Laboratories (ABT, $54.63) is a healthcare company devoted to pharmaceutical, diagnostic, nutritional and vascular products. After the spin-off, the pharmaceutical company would have a new name, and the three remaining business segments would continue to retain the Abbott Laboratories name.
Abbott’s major pharmaceutical products include treatments for rheumatoid arthritis, psoriatic arthritis, HIV, cholesterol and prostate cancer. In the pipeline, Abbott is developing treatments for hepatitis C, kidney disease, pain management, cancer and more.
This spin-off is by no means an attempt to boost a fast-growing segment of a company by removing it from a larger, stagnant company. Morgan Stanley Research raved about Abbott’s vascular business in a Nov. 14, 2011 report. ”We believe there is significant runway remaining for Abbott Vascular in terms of market share capture, particularly in peripheral vascular, which includes balloons, stents and wires. Key products in the pipeline include the BVS, which could prove the safest on the market and is in development for coronary and peripheral use, and the eValve MitraClip, which we expect to remain targeted for very high risk surgical candidates.”
Analysts project Abbott’s earnings (EPS) growth to be 11.5%, 8% and 7% for fiscal years 2011 through 2013. The 2012 price earnings ratio (PE) is 10.9 and the dividend yield is 3.51%. Abbott’s high & low PE ratios over the last ten years have been 58 and 11, which indicates that the stock is at the extreme low end of its valuation history.