I have been a shareholder of Abbott Laboratories for several years. I liked the fact that the company was constantly undervalued, and also managed to offer a very attractive yield plus an above average dividend growth. My last addition to my position occurred in the final weeks of 2012. In my last analysis of the stock, I was bullish on its business going forward.
On January 1, 2013, Abbott Laboratories split into two companies, one which retained its name Abbott Laboratories (ABT), and another named Abbvie (ABBV). For every share of legacy Abbott Laboratories, shareholders received one share of Abbvie (ABBV) and one share of the new Abbott (ABT). Following the split, Abbott has declared a dividend of 14 cents/share, while Abbvie declared a dividend of 40 cents/share. The total annual dividend combined for both companies of $2.16 is above the $2.04/share annual dividend declared by legacy Abbott in 2012. This former dividend champion had boosted distributions for 40 consecutive years. For legacy Abbott shareholders, this new dividend from the sum of the parts translates into the 41st consecutive year of higher dividend income.
Abbott (ABT) is focused on nutritionals, diagnostics, generic drugs and medical devices. The company yields 1.70%, but has the potential to grow earnings significantly over the next few years. Abbott Laboratories is expected to earn $1.95/share in 2013, which translates into a forward P/E of 16.80. Approximately 40% of sales will be derived from emerging markets, while 27% are derived from the US. The company has opportunities in medical products that have consistent earnings per share growth and strong sales, coupled with large mix of products addressing different areas of health care. Abbott is the leader in each of its four segments, which contribute almost equally diversified revenues for it. For example, in its medical devices segment, Abbott is number one for Lasik surgeries and a number two for Cataract surgery. Other positive trends behind each of the four businesses include favorable long-term healthcare and emerging markets growth. There is an increased demand for healthcare products due to aging of population in much of the developed world as well as the increase in chronic disease.
In the generic drugs segment, BRIC’s account for over 30% of sales, which are expanding at the high teens. Emerging markets as a whole accounted for 60% of sales in this segment in 2012, which could increase to 70 -75% by 2015. Driving trends behind this include population growth coupled with rising incomes. Other growth factors include improving access to healthcare for people who have not had access to modern facilities before.
In the medical devices segment, growth could be driven by continued innovation, margin expansion, as well as capitalizing on emerging market growth. The firm is a leader in LASIK and holds a number two spot in cataract segment of the market. Cataract is a market segment identified as very profitable and growing rapidly by Abbott. The company is developing new technologies to drive market share growth. In addition, Abbott is advancing new product pipeline to address unmet testing needs of insulin-users. New products such as its drug-eluting stents, coupled with cost reductions, could lead to margin improvements in this segment.
In the Nutrition segment, growth could be driven by several factors such as high number of emerging markets birth rates, tripling of aging population in the next 35 years,a 70% increase in the emerging market middle class households by 2016, as well as the growing awareness of nutrition by consumers. The company expects to add over a billion in incremental sales from innovations by 2016, and also plans on expanding aggressively in seven key emerging markets. In addition, the firm also plans on increasing margins from 13% of sales in 2011 ro over 20% in sales through a few initiatives on product packaging, supply chain & distribution, and improving efficiencies for manufacturing processes at different plant locations.
Growth in the diagnostics segment could come from higher sales in emerging markets, margin expansion and new products that are result of continuous reinvestment in R&D. This segment has managed to increase margins from 8% in 2007 to 18 in 2012. The company expects margins to be higher than 20% by 2016. Abbott expects a 4% – 5% growth in this segment through 2016, most of which would come from emerging markets such as China, Brazil and Russia. Diagnostics products represent less than 5% of hospitals costs, but drive majority of decisions. With the increased awareness of health and disease prevention and increased amount of healthcare spending, this segment offers the opportunity for more growth, provided that adequate products to meet demand are offered to clients.
Abbvie (ABBV) is focused on numerous drugs including Humira, Kaletra, Lupron, Synagis etc.. Almost 55% of revenues are generates in the US, and 14% in emerging markets. The drug generates 9 billion in sales worldwide, which has grown by approximately $1 billion/year since 2008. Humira generates approximately 50% of revenues for Abbvie, but % of income. Abbvie’s patent for Humira in the US expires at the end of 2016, while the European equivalent is expected to expire by April 2018. However, since HUMIRA is a biologic and biologics cannot be readily substituted, it is uncertain what impact the loss of patent protection would have on the sales of HUMIRA. This provides a higher barrier for entry. As a result, sales are not going to fall right off the cliff, since it would be more difficult for competitors to reverse engineer it and create a generic substitute. In the meantime, the drug is expected to provide low double digit sales growth at least until 2016-2017.
The strong cash flow generated, should be sufficient to advance Abbvie’s pipeline of drugs. The company has more than twenty compounds in Phase II or Phase III development. Over the next three year, Abbvie expects to launch a few new products treating Hepatitis C Virus, Parkinson’s disease, multiple myeloma, multiple sclerosis and an inhibitor for chronic lymphocytic leukemia. In addition, the company could grow by expanding presence in Emerging markets such as Brazil, China, Russia, Mexico, India and Turkey. Strategic acquisitions could also pave the way for future growth in revenues.
One of the drugs that could offset some of Humira’s decreasing sales after 2017 is its Hepatitis C Virus product, for which market entry is targeted for early 2015. This is a $3 billion dollar market, which could grow 5- 6 times by 2020. The US, Japan, Brazil, China and Russia represent over 90% of worldwide sales.
Abbvie is expected to earn $3.06/share in 2013, which translates into forward P/E of 12.20. The company also yields 4.40%, and has an adequately covered distribution.
Usually spin-offs perform very well after the event, with the stocks delivering outstanding returns on aggregate in the first year or two after the event. I would wait for a few years to see how both companies develop as separate entities. I did like the legacy company with its long history of earnings and dividend growth, and believe that both Abbott and Abbvie will grow shareholder wealth over the next decade. So far, Abbvie looks like a company that is more mature and therefore pays out a higher proportion of earnings than Abbott. Hence, Abbvie’s yield at 4.40% is higher than the yield on Abbott. I would monitor the growth in distributions, and would automatically sell if dividends are cut or eliminated in either firm. However, since both companies have not had a chance to operate for long periods of time, I would simply hold on to my position.
Full Disclosure: Long ABT and ABBV
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