Abbott's Winning (Baby) Formula For Success. Are There More Spinoffs to Come?

Earlier this year Abbott (ABT)  jettisoned its proprietary pharmaceutical business, AbbVie (ABBV), in the form of a tax- free stock spinoff to shareholders. The new Abbott is a diversified healthcare company that consists of four major businesses that include: nutritional products, branded generic pharmaceuticals, medical devices, and diagnostics. 70% of the company’s sales come from outside the United States and 40% from emerging markets.

Abbott’s nutritional division is the real jewel of the company. With $6.5 billion in revenues (40% from emerging markets) and products such as Similac, PediaSure, Ensure, and EAS Sports Nutrition, it is no wonder that Abbott commands the number one market share in adult nutrition worldwide and the number one market share in pediatric nutrition in the United States. This business has seen double-digit growth primarily outside the United States, and the trend is expected to continue due to an increased awareness of the role of nutrition in healthcare, an aging population that is expanding globally, and rising incomes and high birth rates in emerging markets. Countries such as China are turning to powdered milk imports since the 2008 incident where six children died and 300,000 became sick after consuming contaminated Chinese powdered milk. These markets are also seeing a reluctance for women to breastfeed in part because more women are working and perceive powdered milk to be nutritionally better.

In a noteworthy transaction last year, Pfizer  (PFE) completed the sale of its nutritional business to Nestle for $11.85 billion. This price was nearly 20 times the business’s estimated $590 million earnings before interest, taxes, depreciation and amortization (EBITDA), and from a valuation perspective, was consistent with prior deals in the industry. Abbott’s nutritional business had 2012 EBITDA of $1.2 billion. With Wall Street projections of $8 billion in revenues and $1.8 billion in EBITDA for 2015, it’s not hard to see where the bulk of Abbott’s growth and value will come from.

Abbott’s other three businesses ($15.5 billion in combined revenue) are also leaders in their respective categories, holding the number one position in blood screening, stents, and LASIK; number two in cataract lens removal and replacement systems, and number three in glucose monitoring devices. All of these businesses have the opportunity to expand operating margins and to grow as a result of the evolving or expanding healthcare systems in emerging markets. Two significant new developments include Absord, a bioresorbable stent that resorbs into the body after a couple of years, and MitraClip, a device that treats mitral regurgitation (a problem that occurs when the mitral valve in the heart leaks) non-invasively. These products have launched in a number of international markets and are under FDA review in the United States.

Abbott is poised to generate over $3 billion in free cash flow this year and announced a $3 billion stock repurchase plan last month. Since 2002, the company has returned $31 billion in cash to shareholders in the form of stock buybacks and dividends. The company has also had 41 consecutive years of dividend increases.

Abbott is trading at a price to earnings ratio of 20 times trailing twelve month earnings and has a dividend yield of 1.6%.

Andrew Goodman is the Chief Investment Officer at CIC Wealth

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