This week, the long-anticipated split of Abbott Laboratories (ABT) finally took place. Shareholders who held their shares before the start of 2013 will now hold one share in Abbott Laboratories and one share in AbbVie (ABBV).
As a result of the split, shareholders will now own a medical device company which continues to operate under its old name. Shareholders will furthermore hold one share in AbbVie which continues with its proprietary pharmaceutical activities. Both companies generate roughly $21 billion and $18 billion in annual revenues, respectively.
Shares of Abbott closed at $34.39 on Friday, while shares of AbbVie ended at $33.07, for a combined value of $67.46. The combined value of the holdings has increased 3.0% from Monday's closing price of $65.50 per share.
Abbott announced the plans to split itself up already back in 2011. It has not been the first company which has come under pressure of shareholders to split itself up. Last year, ConocoPhillips split itself up into Conoco (COP) which focuses on exploration and production, and Phillips 66 (PSX), focused on the refining and downstream activities.
Many commentators argue that the split is a good thing for investors, as it allows the market to price the businesses on an individual basis. Many attributed a possible conglomerate discount under the old structure to the riskiness of the proprietary pharmaceutical activities now held by AbbVie.
The main risk lies within the Humira drug, which is focused on rheumatoid arthritis, which is facing competitive pressure from Pfizer (PFE). The drug generated roughly $8 billion in annual revenues, compared to total revenues of $18 billion for the entire business. The drug is losing patent protection at the end of 2016 in North America and a year later in Europe. Another worrisome factor is the empty pipeline of the business after the expiration of Humira. Luckily for AbbVie, the company has time and resources to alleviate the concerns.
Steady Abbott Laboratories
Abbott Laboratories, on the other hand, owns very diverse and stable businesses. It generates revenues from four major divisions including generic drugs, nutritionals, vascular and diagnostics, thereby providing quite some diversification.
Even more interesting, the business generates some 40% from its revenues from emerging markets, including India and China, and aims to boost that percentage to 50% in the coming years.
As a result of the split, AbbVie has been given roughly $7.2 billion in cash, equivalents and short-term investments and it operates with a total debt position of roughly $15.7 billion, for a net debt position of roughly $8.5 billion. The market values the spin-off at $54.4 billion.
For the first nine months of 2012, AbbVie generated $13.2 billion in revenues on which it reported a net income of $3.7 billion. At this pace, the company is on track to generate annual revenues of $17.6 billion on which it could earn almost $5.0 billion.
This values AbbVie's operating assets at roughly 3.1 times annual revenues and roughly 11 times annual earnings. The company will pay $0.40 in dividends per share on a quarterly basis for an annual dividend yield of 4.6%.
Abbott on the other hand ended its third quarter with a net debt position of $2.5 billion. Abbott is valued at $52.3 billion at the moment.
For the first nine months of 2012, Abbott generated $15.8 billion in revenues on which it net earned $1.2 billion. The company is on track to generate annual revenues of $21 billion on which it could earn roughly $1.6 billion. This values the firm at 2.5 times annual revenues and 32-33 times annual earnings.
Abbott is expected to pay a quarterly dividend of $0.14 per share for an annual dividend yield of 1.7%.
AbbVie is without a doubt the more risky business on an operational basis, given its reliance on Humira. On the other hand, Abbott has superior product and geographical diversification.
Investors should note that this risk is already priced after the split. Shares of AbbVie trade at 3.1 times 2012 revenues and merely 11 times earnings. Furthermore, the company pays a 4.6% dividend yield.
Abbott on the other hand, trades at 2.5 times annual revenues and 32 times annual earnings. This earnings multiple is expected to come down significantly as analysts expect earnings to increase significantly in the coming year. The company pays a quarterly dividend of just 1.7%.
Following the spin-off, the risk-reward ratio for AbbVie's shares is far better than Abbott at the moment.