When it comes to success with investing, Warren Buffett is hard to one-up, to say the least. But even if you can't outperform him, you just might be able to get (approximately) similar returns by copying his trades or at least dodge some problems by selling when he does.
On that note, in the first quarter of this year, the Oracle of Omaha's company, Berkshire Hathaway (BRK.A 1.18%), sold 100% of his three million AbbVie (ABBV 1.06%) shares with a total value of around $410 million. Contrary to his stated preference of holding stocks for extraordinarily long periods, Buffett only established his position in the company in the third quarter of 2020. And his stake was only around 0.1% of Berkshire Hathaway's portfolio, so it wasn't ever exactly a core holding.
Still, if a stock isn't good enough for Warren Buffett, it's reasonable for investors to wonder whether they should head for the door, too. Let's analyze what might have motivated him to see whether it's relevant to you.
Image source: Getty Images.
What might have motivated Buffett to sell?
For the uninitiated, AbbVie is among the biggest pharmaceutical companies in the world by market cap, clocking in at about $266 billion, and it brought in more than $56 billion in revenue during 2021 alone. It's firmly profitable, and its trailing 12-month revenue increased by more than 112% over the last five years. What's more, its quarterly free cash flow (FCF) grew by 153% in the same period. And to top it off, the total return of its shares in that time was 175%, thrashing the market's return of around 85%.
There are a few things that Buffett probably never liked much about the stock, though. First, AbbVie's debt load of $73.6 billion is quite high. Only around $9.9 billion of that debt is current. And the company is making headway in paying off its long-term debt, too; its net debt issuance over the past 12 onths shows repayment to the tune of nearly $11.3 billion.
But from Buffett's perspective -- and he's correct -- there are many other businesses out there that don't need to devote roughly half of their free cash flow to deleveraging. That means those alternatives could probably grow faster.
In Buffett's view, value should be retained and reinvested within organizations as much as possible. That's another issue he could have with AbbVie as it pays a dividend and spends money to buy back shares of its stock. By distributing excess earnings to shareholders, the company is giving away the resources that could be funneled into growth, which somewhat compromises its long-term value.
Plus, dividends are tax-inefficient (another one of Buffett's pet peeves) as shareholders are taxed both on the company's income and their personal distribution via capital gains. What's more, AbbVie's management prioritizes raising the dividend over time, and the payout has grown by 120% in the last five years. Continuing that trend could please shareholders, but it's a signal to Buffett that there might be under-investment in the company's growth afoot.
The largest and last nail in the coffin for Buffett's AbbVie holdings was probably declining revenue from Humira, the company's blockbuster psoriatic arthritis drug and one of the best-selling drugs of all time. In 2021, Humira was responsible for sales totaling nearly $21 billion. But the drug's exclusivity protections are slated to expire in 2023, and its international sales are already collapsing rapidly.
AbbVie has a pair of other medicines it claims should be able to recoup Humira's market share and total revenue so that the business can keep growing, but Buffett might be skeptical of this plan.
Your situation may be different from Buffett's
If you're invested in AbbVie to capture its ever-rising dividends or its relatively stable growth earned from commercializing new drugs, it may not make sense to follow Warren Buffett's lead and sell your shares. Nor should Buffett's exit dissuade you from purchasing a few shares for the first time to get some additional income.
On the other hand, if you're intent on following his value-investing approach to a T, it's true that AbbVie has enough flaws that -- when taken together -- may constitute a deal-breaker.
Just be aware that to be a true student of Buffett, you should probably wait to sell for at least as long as it takes to get the sale registered as long-term capital gains rather than short-term capital gains. That would enable you to avoid the higher tax rate -- which Buffett would not be a fan of even on the way out the door.
