Abbott Labs: 2 for the price of 1

A breakup of the drugmaker into separate operating entities should unlock shareholder value.

By TheStockAdvisors Feb 8, 2012 11:09AM

CorbisBy Gregory Dorsey, Leeb's Income Performance Letter

In addition to quantifiable metrics such as reasonable valuations, solid growth prospects and a strong balance sheet, one of the less tangible characteristics we look for is a history of maximizing shareholder value.

It adds a measure of safety that can protect investors if the market hits a rough patch. Such is the case with Abbott Labs (ABT). Abbott announced last fall that it was splitting itself in two, a move it expects to finalize toward the end of this year. Indeed, with this stock investors are getting 'two for the price of one' as the company.

There are both opportunities and risks with the breakup, but we like the odds and agree
that dividing the company will unlock value for shareholders.

Abbott's mature pharmaceutical business, which will have annual revenue of about $18 billion following the split, has leading proprietary brands for treating immunological, HIV, cystic fibrosis, thyroid and others diseases. The company also has a number of promising drugs in the development pipeline.

On the other hand, products that represent more than 8% of Abbott's revenue are set to come off patent in the next few years and will face stiff competition from generics.

As a standalone, the business will likely sport a high single-digit or low double price-to-earnings ratio and pay an attractive dividend yield.

Abbott's faster-growing business is medical products, which will keep the parent name and generate more than $22 billion in revenue from products such as heart stents, infant formulas, generic drugs and other products.

This business will command a higher earnings multiple, but pay a smaller dividend. And it, too, will be subject to intense competition. 

The combined dividend of the pair will equal the stock's current payout. Moreover, the sum-of-the-parts value of the company post-breakup is likely to be at a premium of 10% to 15% above the current share price.

Tack on the 3.4% dividend yield the stock will pay, and we should earn a nice total return in the process.

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