Love Serenades and New Flings

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By Vitaliy Katsenelson

I sang love serenades for Abbott Labs’ (ABT) stock for a long time. Call me materialistic, but my love for stocks is not ‘til death do us part,’ it is conditional of fundamentals staying intact and of valuation – it has to be undervalued. Abbott Labs’ fundamentals have improved over the last couple of years – it sold its medical device unit to General Electric (GE) at a great premium and it “stole” a stent business from Guidant playing on Boston Scientific’s (BSX) urgent need to close the deal. Abbott’s management have proven the company to be a very shrewd operator. However, Abbott did what any good stock will do at some point (hopefully) – it appreciated and became fully valued. Though I still love the company, I had to say goodbye to Abbott’s stock. Hopefully, I’ll be able to buy it in the future on my terms, at a lower price.

I found a new ‘fling’ – Glaxo Smithkline (GSK) – Abbott’s worthy replacement. GSK reminds me of Abbot’s stock about two years ago: decent (very similar to ABT) growth prospects ahead (earnings growth of about 7-8% a year) further helped by a growing industry, a strong balance sheet, great return on capital of close to 40%, fat 20% plus profit margins, and a competitive moat around its business that rivals the size of Lake Michigan. All that coupled with great valuation of about 14x earnings and 3.3% dividend yield. On top of all that it comes with an added bonus, its dividend is paid in pounds and converted to dollars – if the dollar decline continues (my expectation), its earnings and dividends will rise in US dollars.

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3 Comments

  1. I have owned ABT since 1957. It has been a wonderful “work horse” in my portfolio. I believe in it very strongly because in 50 years it has had its ups and downs, but always has moved upward in value. I have talked to you before about this company. I feel you are wrong in leaving this investment. It is one of the very best companies in the drug and medical supply business in the world. I have met the people at Abbott several times, and they are the very best. Thank you, Sincerely, Thomas D. Roberts

  2. Hello Thomas, I remember our conversation. I still believe ABT is a wonderful company, it is just fairly valued as a stock.

    Best,

    Vitaliy

  3. Vitaliy, I have held Abbott Stock since 1987. Through many ups and downs, ignoring advice to sell when times were bad, my total return over 20 years has been 269%. In addition, I get a niftly dividend check 4 times a year. ABT has a history of splitting the stock when it reaches $70. Also, when ABT spun off Hospira in 2004, stockholders of record received a chuck of Hospira stock. The 14K worth of HSP I received is now worth 21K. Holding onto ABT may go against Contrarian views; however, to me, it makes sense. Remember, just $15 more to a stock split!

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