Abbott Laboratories: Buy in the $50 to $52 Range

Abbott Laboratories  shares have risen from a low a 12 month low of $45.07 set in August last year to now stand at $55, a fraction below their 52-week best of $56.84. Shares in the drugs giant remained little changed after fourth quarter results on January 25. 

Those results reported earnings a penny above market consensus estimates of $1.44 per share, an increase of 10.5% year on year. Full year earnings per share, before specific expenses totaling a net $1.65 per share, come in at $4.66 per share, at the upper end of company forecasts, and it has given guidance for 2012 of $4.95 to $5.05. Recent history dictates that the actual results will be very close to guidance – in each of the last four quarters earnings per share have been realized to within 1% of estimates.

At the current market price, shares are trading at a trailing price to earnings ratio of 18.34, and a forward price to earnings ratio of 10.34. Shareholders benefit from a dividend yield of 3.50%, and the company has increased the dividend for 39 years straight. Over the past five years, average annualized growth of the dividend has been a shade over 10%.

The company is preparing to split itself into two publicly traded entities. The first will concentrate on diversified medical products – branded pharmaceuticals, diagnostics, nutritional and vascular products – whilst the second will be a research based pharmaceutical company, including its proprietary pharmaceuticals and biologics. It plans for this process to be completed by the end of this year. Through 2011, Abbott Labs launched several new products, including a gene molecular diagnostics test, products for diabetes sufferers, and coronary balloon systems and stent systems. In addition to these new products, the company also has over 20 potential products in phase 2 or phase 3 development. These include antivirals to combat hepatitis C (a diseases that affects 180 million people worldwide), the kidney disease treatments Bardoxolene and Atrasentan, and the antibody treatment for cancer, Elotuzumab. The company has been moving away from patented drugs and toward vaccines, nutritionals, and over the counter generics.

When measured against other large cap peers in the sector, on a forward price to earnings basis and a dividend yield basis, Abbott comes out middle of the road. Eli Lilly (NYSE: LLY) yields 5% and trades on a forward price to earnings ratio of 12.29, Merck’s (NYSE: MRK) numbers are 4.3% and 10.06, and Pfizer’s (NYSE: PFE) 4.1% and 9.34. Lilly, Merck and Pfizer are all facing significant patent cliffs.  Lilly expects sales of Zyprexa to fall another 6% to 10% after the underlying patent claims expired in October 2011.  Merck faces the loss of exclusivity on its patent for Singulair, the asthma medication which saw over $10 billion in sales last year.  Pfizer saw cholesterol statin drug Lipitor and its hit antacid drug, Protonix lose patent protection in 2011.  These two drugs saw over 5$ billion and $600 million in sales in 2011, respectively.  On this basis alone, I would rate the shares as a hold until the companies can show that they can make up for these lost revenues with new drug development. For Abbott, looking at the long term chart, it can be seen that Abbott shares are trading near their all time high. Further progress in the short term will be reticent at this level, though strong support should be seen at between $50 and $52, and this should be bolstered by the company’s decision to resume share repurchases through 2012. At this level, the yield will be approaching 4%.

Overall, I like Abbott Laboratories for its management strategy and great dividend history. I see no reason to doubt that the dividend will be increased again next year, and if increased by the 5 year average of 10%+ then this would imply a dividend of around $2.10. Should the shares remain at a yield rating of 3.5%, then this would imply a share price of $60.  

Most attractive to me is the potential that the split offers to shareholders for both growth and income. I believe the two companies will benefit from a more focused management and could attract further investment from more targeted funds. Whilst I would be happy to hold shares at their current level, I would look to buy on a dip in the share price to around $50 to $52.