The first day of trading in 2013 started with a bang thanks to the fiscal cliff deal Congress was able to cobble together and pass through both the Senate and the House of Representatives. Hidden amongst the excitement was Abbott Laboratories' (NYSE:ABT) spinoff of its pharmaceutical business into a separate publicly traded company. AbbVie Inc. (NYSE:ABBV) is expected to be the growth vehicle of the two companies. I'll look at which stock is the better investment.

Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.

Abbot Labs
In the planning stages since October 2011, Abbott Lab shareholders received one share of AbbVie for every share held in the former parent. Abbott Labs will have revenues of approximately $22 billion after the spin-off with 40% in emerging markets, 30% in developed markets outside of the United States and the remaining 30% at home in the U.S. Its sales mix is extremely balanced with all four divisions each generating between 20 and 28% of overall revenues. With just $2.5 billion in net debt, it expects approximately $4 billion in operating cash flow in 2013, which will make it very easy to meet its dividend payout. Although Abbott retains the lower margin businesses, they are very stable while still providing growth opportunities in emerging markets.

Part of AbbVie's estimated $18 billion in revenue will come from Humira, its multi-purpose drug used for conditions like rheumatoid arthritis and Crohn's disease. Unfortunately, the drug's patent expires in 2016 in the U.S. and in mid-2017 in Europe. If it's unable to build a replacement pipeline between now and then, its business could be seriously affected. Unlike its former parent, a majority of its revenue is generated in the U.S. That's something that will have to be improved upon. Acquisitions overseas would seem to make sense now that it's independent. In addition, it will step up the number of uses for its star drug as well as expanding its research and development program for bringing new drugs to market. AbbVie's two biggest problems are that it has a pro forma debt of $15.7 billion, and many speculate that its separation from Abbott Labs makes it easier for larger pharmaceutical companies like Bristol-Myers Squibb (NYSE:BMY) to swoop in for the kill. Fortunately, AbbVie has an initial cash balance of $7.2 billion, leaving it with approximately $4.6 billion to reduce debt after paying a projected annual dividend of $1.60 per share. If business continues to grow, it could be in a net cash position by the end of 2015.

SEE: Cashing In On Corporate Restructuring

AbbVie closed its first day of trading at $35.12, $3.07 higher than Abbott Labs. AbbVie's free cash flow (FCF) yield is 10.3%, 440 basis points higher than Abbott Labs. In terms of revenue, AbbVie closed its first day of trading valued at 3.1 times sales compared to 2.3 times for Abbott Labs. I would gladly pay a little more for revenue when it means the delivery of FCF is almost 75% higher. Long term, the additional cash flow is going to be very beneficial to its growth.

The Bottom Line
I wrote an article about spin-offs in August 2010 that revealed that spin-offs generally outperform the market in the first 18 months of trading. Furthermore, they often make better investments than the former parent. Perhaps that's why the Guggenheim Spin-Off ETF (ARCA:CSD) has outperformed the S&P 500 over the past five years by 269 basis points annually. The numbers don't lie. Spin-off's make great investments.

While the new Abbott Labs doesn't appear to have as much risk as AbbVie, the FCF of the pharmaceutical business combined with the historically strong performance of spin-offs, makes AbbVie the better candidate in my opinion. However, if you owned Abbott prior to the split, I see no reason why you shouldn't hang on to both.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  4. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  5. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  6. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  7. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  8. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  9. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  10. Investing

    5 Recession Resistant Industries

    No companies are completely recession proof, but some industries perform better in a weak economy than others.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!