Streetwise
Lauren Rudd
Sunday, February 28,
2010
Sense in an Era of Economic Stupidity
OK, it is time to stop and get a grip on reality.
Unfortunately, when it comes to economic policy, seldom have so many said so
much about a subject about which they know so little. This became abundantly
clear once again when Republican State Rep. Michael Pitts of South Carolina
introduced a bill in the State Legislature to turn South Carolina into a
cashless state. He wants to ban all federal currency as legal tender, replacing
it with silver and gold coins. This is not a protest, this is dementia.
As a nation, we are in the early stages of extricating
ourselves from the errors of our recent past. And no one will argue that we
still have a long way to go. Cyclical bubbles, while somewhat endemic to a
capitalistic system, they are attributable in no small part to greed and
stupidity. Walt Kelly, creator of the old Pogo comic strip, put it well back in
1970 when he had Pogo say, "We Have Met the Enemy and He Is Us."
Although no one foresaw the extent of the ensuing damage we
wrought upon ourselves, as a nation we still cannot come to grips with why the
medicine required is so distasteful and why the recovery period is so long. Of
paramount importance to the recovery is reducing unemployment.
We took a small step in that direction with the recent
passage of a jobs bill that even had some Republican support. Nonetheless, it
was still followed by an ensuing onslaught of vitriolic commentary and
buffoonery disguised as fact. Charles Darwin put it well when he wrote,
“Ignorance more frequently begets confidence than does knowledge.”
Deriding various stimulus packages as being simply bridges to
nowhere that will bankrupt future generations is unmitigated stupidity. Your
time is better spent searching for additions to a portfolio to better position
yourself against economic cycles.
One suggestion might be investigate Abbott Labs, a global,
broad-based health care company devoted to the development, manufacture and
delivery of pharmaceuticals and medical products, including nutritionals,
medical devices and diagnostics. The company employs approximately 83,000 people
and markets its products in more than 130 countries.
Abbott recently announced its financial results for the
fourth quarter and its fiscal year ended Dec. 31. For the quarter, earnings per
share were $0.98, up 10.1 percent, and $3.69 per share for the year as compared
to $3.12 a year ago. Sales for the fourth quarter increased 10.6 percent to
nearly $8.8 billion, including a favorable 2.4 percent effect of exchange rates.
Full-year 2009 sales were $30.8 billion.
Company guidance is for 2010 is $4.20 to $4.25 per share in
earnings, excluding special items of approximately $0.28 per share, primarily
associated with previously announced acquisitions and cost reduction
initiatives, as well as the one-time impact of the devaluation of the Venezuelan
Bolivar. The guidance midpoint reflects growth of approximately 13.5 percent and
includes the expected February 2010 close of the Solvay Pharmaceuticals
acquisition.
If you include the special items, guidance declines to
between $3.92 and $3.97 per share, excluding the integration costs associated
with the Solvay acquisition, which still need to be quantified.
Abbott also announced that it was raising its quarterly
dividend by 10 percent to $0.44 per share.
This increase marks the 38th consecutive year that Abbott has increased
its dividend payout and the 345th consecutive quarterly dividend to be paid by
Abbott since 1924.
The intrinsic value of the shares using a discounted earnings
model with a 15 percent discount rate and an earnings growth rate of 11 percent
is $70 per share. The more conservative free cash flow to the firm methodology
yields an intrinsic value of $98 per share. The shares recently closed at $54.33
My earnings estimate for 2010 is $4.27 per share with a 12-month target price on
the shares of $65, for a potential gain of about 20 percent. In addition, there
is a 2.9 percent dividend yield.
