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
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.
United Tech and McDonald's had opposite results, but we will be buying shares in both.
We expect analysts to raise estimates.
We added to several holdings into this week's market declines and closed out one position to fund our purchases.
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