Why Abbott Labs fits a defensive portfolio

Shares of a 3% dividend yield, solid blue-chip drug company are valuable in shaky economic times.

By Jim J. Jubak Aug 2, 2012 4:10PM
Image: Pills (© Sean Justice/Corbis)I can't say that I'm a big fan of Abbott Laboratories (ABT), mostly because I'm not a big fan of big drug companies in general. Because these companies are seeing a steady stream of big moneymaking drugs go off patent, they’ve been aggressive buyers of small companies with new potential blockbuster products. 

And frankly, when I have a choice between buyers and sellers in a seller's market, I'll always go with the seller -- an Amylin Pharmaceuticals (AMLN), for instance, recently purchased by Bristol Myers Squibb (BMY).

In fact, I've damned Abbott Laboratories with faint praise, even as I continued to own the shares in my Jubak’s Picks portfolio. I once wrote, as I remember, "Where else in this market can you think of to put your money?" Abbott shares yielded 3.08% Thursday when the 10-year U.S. Treasury yielded 1.48%. And last time I looked, the drug company and the U.S. government had the same "AA" credit rating from Standard & Poor's. I’d argue that if either credit rating is too generous, it’s not the one for the profit-making drug company.

For the next few months, I’m going to be playing a lot of defense -- and so are a lot of investors. I think that makes the shares of a 3% dividend yield, solid blue-chip drug company even more valuable than it was way back in September 2010 when I first bought Abbott shares for the portfolio.

So Thursday, I'm keeping the stock in the portfolio, even though it has reached my $65 a share target price, and increasing my target price to $72 a share by the time later this year when the company splits into two, with the spinoff of the drug business into a new company to be called AbbVie. Investors who are still holding the stock at that date will get shares of both AbbVie, the drug company that will own Abbott’s blockbuster Humira, and the company that will continue to do business under the Abbott name and which will own the company’s current diagnostics, medical devices, and nutritionals businesses.

When Abbott reported its second-quarter earnings on July 18, it beat Wall Street earnings estimates by a penny, as earnings climbed 9.8% from the second quarter of 2011. Revenue climbed 2% from that year-earlier period. Excluding the effects of the stronger dollar, revenue would have been up 6.7%. Gross margins climbed to 63.3% for the quarter, a big jump from the 60.2% gross margin in the second quarter of 2011. The big strength in the quarter was in sales of Humira, up 16%, and nutritionals up 11% year to year.

I've got a 27.8% gain (plus dividends) in Abbott Laboratories since I added it to Jubak’s Picks on Sept. 24, 2010.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares of Abbott Laboratories as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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