This Healthcare Giant is Definitely a Great Buy Now

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I am always excited when a company plans to return more cash to its shareholders in both dividends and share buybacks. Recently, Abbott Laboratories (NYSE: ABT) declared a quarterly dividend of 14 cents per share. Moreover, the company’s board has also authorized a $3 billion share buyback program to replace a $5 billion buyback program that was recently completed. Is Abbott a buy after a recent announcement of both a dividend and a share buyback plan? Let’s find out.

Expanding their reach in emerging markets

Investors might be excited about Abbott due to their strong brand portfolio with leading positions in several business segments, including Nutrition, Diagnosis, Medical Devices and Established Pharmaceuticals. According to the company, it held the number one position in many fields such as Blood Screening, Immunoassay Diagnostics, WW Adult Nutrition, U.S. Pediatric Nutrition and Lasik medical devices. Interestingly, around 40% of its revenue comes from the emerging markets, while the U.S. market accounted for only 30% of its total sales. Abbott intends to increase its presence in emerging markets, which were expected to account for 50% of the company's revenue by 2015.

Spinning off AbbVie makes Abbott looks good

At the end of 2012, Abbott spun off a research-based business, AbbVie (NYSE: ABBV), from the company. AbbVie is considered a developer of advanced therapies to treat complex diseases such as HIV and Parkinson’s disease. The spinoff of AbbVie out of Abbott gives investors more options to choose between Abbott with strong established portfolios or AbbVie, which focuses mainly on drug manufacturing. AbbVie’s main product is HUMIRA, generating nearly $9.3 billion in revenue, accounting for more than half of its total revenue. After the spinoff, Abbott had a much stronger balance sheet, while AbbVie uses a lot of leverage in its operations.

As of March 2013, AbbVie recorded nearly $3 billion in equity, around $6.5 billion in cash and short-term investments, and more than $15 billion in debt and lease obligations. Moreover, AbbVie had a huge goodwill and intangible assets of more than $8.1 billion. Abbott has a much more conservative capital structure. It had nearly $22.6 billion in equity, $8.5 billion in cash and short-term investments, and only more than $7 billion in total debt. Abbott had only $6.1 billion in pensions and other benefits. The goodwill and intangible assets came in at only $8 billion. Consequently, while AbbVie had a negative tangible book value of $(5.1) billion, the tangible book value of Abbott was around $14.6 billion.

Pays low dividend yield but has the cheapest valuation

If investors favor income, they should stick with AbbVie with its juicy dividend yield of 3.8%. Abbott offers a much lower dividend yield of only 1.6%. One of their peers, Johnson & Johnson (NYSE: JNJ) also pays quite nice dividends with a yield at 3.2%.

Among the three companies, Abbott is the most cheaply valued on the market. At $35.60 per share, Abbott is worth nearly 4.7 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). AbbVie is valued much more expensively. It is trading at $42.60 per share, with the total market cap of $67 billion. The market values AbbVie at 9.6 times its trailing EBITDA. Johnson & Johnson had the highest EBITDA multiple of the trio. It is trading at $83.20 per share, with a total market cap of $233.70 billion. It is valued at nearly 10.5 times its trailing EBITDA.

Recently, Johnson & Johnson expanded its oncology drug business by acquiring Aragon Pharmaceuticals for around $1 billion, with $650 million in upfront cash payment. With the recent acquisition, Johnson & Johnson could have the right on the company’s ARN-509, a prostate cancer drug in Phase II development, improving the company’s drug pipelines. Johnson & Johnson felt bullish about the recent acquisition. Its global therapeutic area head Peter L. Lebowitz commented

The acquisition of Aragon further enhances our leadership in prostate cancer drug development. ARN-509 complements ZYTIGA® and provides the potential for exciting, novel approaches to treat prostate cancer patients. Prostate cancer is one of our main areas of focus, and we are pleased to be adding ARN-509 to our portfolio.

My Foolish take

I am quite excited about Abbott, as it owns a strong, diversified brand portfolio with leading market positions. With quite a low valuation, a strong balance sheet and the upcoming $3 billion share repurchases, Abbott could be a good pick for healthcare investors at its current trading price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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