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By Jeremy Glaser and Josh Peters, CFA | 11-09-2012 12:00 PM

Dividend Appeal Lacking in Abbott Split-Up

The newly public AbbVie's dividend will be too concentrated to a single drug, while the payout from the remaining Abbott entity won't be as generous as in years past, according to Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Josh Peters. He's editor of Morningstar DividendInvestor. We're going to talk about what's happening in the world of dividend stocks.

Josh, thanks for talking with me today.

Josh Peters: Good to be here, Jeremy.

Glaser: So, let's start with Abbott Laboratories. This is a company that I know you've liked for a long time, but it's getting ready for a spilt-up of the business.

Peters: Yeah.

Glaser: What's your take on that split, and does it impact the way that you're buying or not buying Abbott shares?

Peters: Yeah, it's actually one that has turned out to be kind of disappointing in the end. I mean we've made a good return in the Abbott shares that we've held in the DividendInvestor model portfolios, but the split-up of the company into two pieces really makes those parts, I think, less valuable for dividend investors in a whole. I think I can describe it pretty quickly. Abbott Laboratories is spinning off its branded pharmaceutical business; that's the new business that's going to be called AbbVie. AbbVie is going to be the big dividend payer. It's targeting a pretty generous payout ratio. My guess is this stock will probably yield 4% or maybe even 5%.

The problem with AbbVie is that half of its revenue and probably more than half of its operating profits are going to come from a single drug called Humira. Humira is a great drug. It's been growing very quickly. It doesn't face the kind of patent cliff that a drug like Lipitor did because it's a biologic, and those are much harder to create generic competitors for. But it's really a risk management question, the way I view it. If anything bad happens to that one drug, if somebody in Iceland finds out it causes warts, that threat has to go right down to the dividend. So, for me, I'm glad AbbVie is paying out that cash, but I think it's a dividend that you have to be a little bit worried about if the unforeseen happens. And that is always I think what you want to be creative about is, "What could be unforeseen come out and blow my dividend out of the water?"

Then there is the rest of Abbott Laboratories, which is a great mix of businesses today. It's going to be a great mix of businesses even without the branded pharma business; it's got diagnostics, nutrition, medical devices, and what they call branded generics in there. The problem there is that's going to be the growth business that doesn't want to pay the generous dividend anymore. My guess is that stock might only yield 2%, plus or minus. Typically, as a dividend seeker, I want to get at least 3%. When I get 3% yield, I'm getting a lot more than I could get on Treasuries. I'm getting competitive with what I could get on corporate bonds, higher-grade corporate bonds. But I'm getting the growth; I'm getting the potential for capital appreciation. If the stock only yields 1% or 2%, I'm not getting the income component I really need in order to make my strategy work. So, even though we still think that Abbott is a little bit undervalued heading into the completion of the split-off, I just don't see that much appeal from here for the two pieces. Frankly, I wish it was staying altogether.

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