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.
Whether the spin-off takes place or not, value investors would do well to look into Abbott’s stock as a possible addition to their portfolios. Standard & Poor’s maintains a 4-Star Buy rating on Abbott and a 12-month target price of $61, per a Dec. 3, 2011 research report. The report says, “…we believe the company has a relatively strong new product pipeline, with possible significant launches in medical device and pharmaceutical areas. We see the company financially strong, with a strong balance sheet.”
Abbott’s stock spent two years trading between $50-$60, then it caught the tail end of the 2008 Financial Meltdown, briefly fell to $25 in 2009, and immediately began a price recovery. The stock then spent almost two years trading between roughly $46-$55, and in recent months $52-$55.
The stock looks like it could easily retrace its former highs in the near future, but it will likely meet with resistance at $60, as some current owners sell. Keep in mind that there are people who bought this stock around $60, 3-4 years ago. They are frustrated and may take an opportunity to sell at breakeven when the stock reaches that price again.
The chart looks constructive, and I believe that we may finally see some incredibly undervalued large-cap stocks climb nicely in the coming years. What would be a good purchase price on Abbott? If I loved the company and definitely wanted to own it, I’d buy it at the current price. If I liked it a lot, but also wanted to feel like I got a bargain, I’d put in a buy order at $52, where it bounced a few times recently. And if I only wanted to buy during market downturns, in order to lock in a super-low price, I’d put in a buy order at $49. We may not see that price again, but people who buy low during market downturns are opportunists, and they have lots of great stocks on their wish lists. If they don’t buy Abbott, they’ll buy Target or Disney or Apple.
Abbott Labs is a stock which might appeal to value or growth & income stock investors. Growth stock investors would do well to find companies with higher annual earnings growth rates. Readers who want ideas on other healthy large-cap stocks are encouraged to sign up for the free-trial offer at www.GoodfellowLLC.com. Happy investing!
“Morgan Stanley is currently acting as financial advisor to Abbott Laboratories with respect to its proposed separation into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals, as announced on October 19, 2011.”
Tax-free stock spin-offs have tax consequences upon future sale of the stock, and spin-offs trigger an adjusted cost basis of the original stock purchase. Readers should consult their investment and tax advisors to determine suitability, risk and taxation.