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Abbott Labs' Dividend Split

|Includes:Abbott Laboratories (ABT), AZN, BMY, JNJ, LLY, MJN, MRK, PFE
Most investors are aware that last week pharmaceutical and healthcare company Abbott Labs (NYSE: ABT) decided to split itself into two companies. One will feature its pharmaceutical products, prescription drugs led by its blockbuster rheumatoid arthritis drug, Humira, while the other company will feature its healthcare products such as medical devices. The new companies will be set up to generate roughly equal revenue, with what is now $40 billion annually. Roughly $18 billion in revenue is expected from the new drug company, with $22 billion from the medical device and healthcare company.

A Stellar Dividend Stock

Abbott Labs is famously known by investors as a star dividend stock, one which consistently raises its dividends. It's included in the S & P list of “Dividend Aristocrats,” a widely followed list by dividend investors, and according to the company, paid dividends every year since 1924 and raised them the last 34 years. Abbott pays an annual dividend of $1.92, which gives it a current yield of 3.7%. The company has an $84 billion market cap, earned $3.23 per share in the last year, traded recently at a trailing PE of 16.5, and its shares traded recently near a 52-week high of $54.05.

Abbott Labs' Record Of Dividends

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A Dividend Division

One of the decisions that Abbott made for when the company splits in two next year is to divide the dividend equally between the two companies. Both the pharmaceutical company and the medical device company will pay out half of what the current dividend pays. Abbott has long been a favorite of dividend investors because of its consistent history of solid dividend increases, and investors have come to expect this. So with the revenue and earnings of Abbott which look sound, along with its excellent history of paying dividends, what's the reason for breaking up the company?

Seeking Growth

Abbott's share price has essentially been flat and range bound in the last ten years. In the last two years, the stock had barely edged up. While revenue has increased, earnings have been up and down a bit in the past three years. The projected spinoff of the drug and medical device businesses each as separate companies is an attempt to kick start growth and unlock value. Abbott's flagship drug, Humira, which still has five years to run on its patent, accounts for $6.5 billion in sales. While Abbott carries other products, none have the impact that Humira has, which has led to further speculation that Abbott's prescription drug business will be very attractive for a takeover.

Takeover Candidates

A number of other drug makers who lack the blockbuster product such as Humira have been mentioned as possible suitors for the Abbott's prospective pharmaceutical spin off. European drug makers Roche Holdings AG (RO.SW) and Bayer (BAYN.DE) were mentioned by analysts in a Bloomberg article as likely candidates. Also, Merck (NYSE: MRK) and Astra Zeneca (NYSE: AZN) are other possible acquirers. The spin off of Abbott's pharma business was valued in the neighborhood of $45 billion to $55 billion by analysts quoted in the piece.

Abbott Labs Stock Ten Year Price Chart

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Two Companies, Two Dividends

Many pharmaceutical companies pay rich dividends. Merck currently yields 4.6%, Pfizer (NYSE: PFE) 4.2%, while Eli Lilly (NYSE: LLY) pays out at a 5.1% rate, Astra Zeneca (NYSE: AZN) pays 3.6%, and Johnson & Johnson (NYSE: JNJ), the combination drug and consumer products company, pays 3.5%. Abbott Labs has been compared to Johnson & Johnson—a smaller, less diversified version—and some observers had expected Abbott instead to pursue more acquisitions, to keep growing through expansion rather than engineer its own break up.

Yet as pointed out in a Wall St. Journal piece, the trend toward pharmaceutical companies breaking apart their conglomerations is in place. Bristol-Myers Squibb (NYSE: BMY) spun off Mead Johnson (NYSE: MJN), which now carries a much higher valuation than Bristol-Myers. For Abbott and most of the other pharmaceutical companies, its drug business is much more narrow, its main revenue often tied to one or two main products, while the healthcare segment usually features an array of often disparate though diversified products.

For Dividend Investors

Many long-time Abbott investors who hold the stock for the dividend will perhaps be disappointed that the entire current dividend isn't going to be paid by the proposed pharmaceutical business. Then dividend investors could have simply continued holding onto that version of Abbott Labs stock, which might have even had a chance to bump up its yield, while investors might sell shares of the spin off healthcare company if they weren't interested in keeping that stock. But dividend investors should wait to see how this spin off materializes and keep their options open. That's the best way to ensure your profits.

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