We're approaching two years after Abbott Labs (ABT -0.96%) spun off its pharmaceutical division AbbVie (ABBV -0.72%) and a little less since Zoetis (ZTS 0.20%), Pfizer's (PFE -0.27%) animal health division, separated from its patent company.
Seems like a good time to see which spinoff has performed better. Let's take a look at a couple of metrics.
Returns Winner: AbbVie
Measuring by stock price. AbbVie clearly wins. The following chart begins when Zoetis went public. AbbVie is up 98% since inception, more than double the 41% increase that the S&P 500 managed.
Dividend Winner: AbbVie
AbbVie's dividend yield is 3%, substantially better than Zoetis' token 0.7% dividend. For now, AbbVie looks like the clear winner, but both companies have raised their dividend since going public, and Zoetis increased its dividend by 11%, compared with just a 5% increase for AbbVie.
The sustainability of the dividend is just as important as its current level. For that category AbbVie is leading, using 54% of its free cash flow through the first nine months of 2014 toward its dividend. Over the same time period, Zoetis used almost all of its free cash flow to pay its dividend, although that's partially because of large payments associated with the separation form Pfizer, which should go away.
Takeout Potential Winner: Zoetis
AbbVie is more likely to be a buyer than to be bought. In fact, it was planning on buying Shire (NASDAQ: SHPG) until the U.S. took away the benefit of a tax inversion.
Zoetis, on the other hand, has been the rumor of a takeout by Bayer AG. There are definite advantages to being large in the animal health business, and being the largest company currently means any conglomerate that buys Zoetis will automatically be the largest animal health company, eliminating the top competition and distancing themselves from the rest of the pack.
While a buyout potential is never the best investment thesis because it's impossible to know if it'll come to fruition, the potential of a buyout shouldn't be dismissed either, because the possibility of a buyout will help support the share price.
Stability Winner: Zoetis
It's hard to get too excited about the growth potential of the animal health business compared to the potential for billion-dollar blockbuster prescription drugs. But with blockbuster growth comes blockbuster declines as drugs lose their exclusivity.
AbbVie is particularly at risk because its anti-inflammatory drug, Humira, made up 63% of net sales through the first nine months of the year. Biosimilar copycats are coming, and while they won't completely ravage sales like generic drugs typically do to small-molecule branded drugs, the competition will knock down sales.
Zoetis sells more than 300 different products, limiting the liability from competition that a single product might have. It's dominant position as the market leader also helps fend off competition.
Best bet?
While both companies are spinoffs from large pharmaceutical companies, their characteristics are quite different. If you'd like a company with the potential to produce substantial gains with a considerable amount of risk, then AbbVie is the way to go. Want boring but steady growth? Then Zoetis is a better bet.
Or maybe just buy both.
