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Jim Cramer's Action Alerts PLUS

Action Alerts PLUS

Better for AbbVie to Walk Away

BY Jim Cramer and Stephanie Link | 10/21/14 - 11:17 AM EDT
Stocks in Focus: ABBV

Late Monday, AbbVie (ABBV) officially announced that it had terminated its proposed acquisition with Shire due to the retroactive nature of the U.S. Treasury’s new rules on tax-inversion deals. This is not surprising, and we wrote about it a few times last week when the company announced it would hold a special Board of Directors meeting to discuss the situation.

As we wrote then, the CEO had recently supported the deal in late September, so in that sense it was a surprising development -- but, as we also noted, the new rule changes rendered the transaction less synergistic. The deal, after all, wouldn’t have lowered the tax rate, and the company wouldn’t have been able to repatriate the cash for share buybacks or dividends. Again, we’d rather have a company walk away now than make a bad acquisition.

In addition to the deal termination, the company also announced a 17% dividend increase to $0.49 per share, implying a 3.6% dividend yield. AbbVie also announced a new $5 billion share-repurchase deal, or 6% of its market capitalization. This is a positive development.

Part of the reason we bought in to this position was for the Shire synergies and the diversification impact it would have on AbbVie’s pipeline, so we were slightly disappointed when the news broke last week. But the shares still offer upside potential following the 6% share-price correction. Also in AbbVie’s favor is the underappreciation of its main drug, Humira, as well as the exciting opportunity for its hepatitis C treatment, for which approval is expected mid-December. Analysts believe the peak sales for the company’s hep C franchise could exceed $4 billion, and we are encouraged by the initial uptake of the competitive product out of Gilead (GILD).

We also await an early-2015 regulatory filing for AbbVie’s phase II data on ABT-199 for the treatment of chronic lymphocytic leukemia (CLL) patients. Moreover, following the cash-distribution news, the stock now has the second-highest dividend yield in the sector (Pfizer (PFI) is the first), and the shares trade at a cheap discount to the group at 13x forward estimates. We see shares getting to the upper $50s on AbbVie’s own fundamentals.


Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUS was long ABBV.

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10/21/14 - 09:13 AM EDT
Apple Earnings Beat Impressively
Stocks in Focus: AAPL

We expect analysts to raise estimates.

10/20/14 - 07:42 PM EDT
Weekly Roundup

We added to several holdings into this week's market declines and closed out one position to fund our purchases.

10/17/14 - 05:50 PM EDT

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Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
ABBV 1.93% Drugs
AIG 2.97% Insurance
AXP 5.21% Financial Services
DOW 4.67% Chemicals
ESV 3.03% Energy
ETN 4.54% Industrial
KMI 2.91% Energy
LEA 4.17% Automotive
M 3.55% Retail
MCD 1.73% Leisure
MSFT 2.73% Computer Software & Services
PNRA 2.89% Leisure
PVH 2.64% Consumer Non-Durables
RDS.A 4.14% Energy
SBUX 3.81% Leisure
STI 3.53% Banking
TWTR 2.69% Internet
WAG 3.39% Retail

Stocks we would buy on a pullback

Symbol % Portfolio
AAPL 3.19% Consumer Durables
CI 3.88% Health Services
FB 4.19% Internet
GM 3.98% Automotive
GOOGL 4.80% Internet
GS 2.91% Financial Services
JNJ 2.36% Drugs
UTX 4.94% Aerospace/Defense

Stocks we would sell on strength

Symbol % Portfolio
BAC 4.10% Banking
VALE 1.43% Metals & Mining

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