Pharmaceuticals and Index Funds

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Dear Mr. Berko: My stockbroker is advising me to sell my 400 shares of AbbVie Inc., which was a 2013 spinoff of Abbott Laboratories. I inherited 400 shares of Abbott Labs when my daddy passed in 2002. Dan, my broker and friend, wants me to buy 200 shares of Hospira Inc. He thinks this is an undervalued drug stock and could rise to be $110 a share this year. He says that Hospira will begin to pay a dividend of $1.50 a share this year and that the dividend could rise to $3 by 2018. And if the dividend rises to $3, that would be a 3.75 percent yield. Then, with the remaining $10,000, he wants me to buy the PowerShares QQQ Trust exchange-traded fund for additional conservative growth. My wife insists that I write for your advice before I do this.

- WS, Jonesboro, Ark.

Dear WS: You have a very wise wife. Treat her to a fine dinner in the executive dining room at McDonald's.

Abbott Labs (ABT-$46) has been very good to you, or perhaps I should say your daddy was very good to you. You may not know this because Broker Dan didn't tell you, but in 2004, you owned 40 shares of Hospira (HSP-$87), and it traded between $24 and $35. Just before the silly 2004 Summer Olympics cost Greece a ridiculous $15 billion, Abbott gave you one share of HSP for every 10 shares of ABT stock you owned. Then, in late 2012, ABT gave you another present, one share of AbbVie (ABBV-$55) for each ABT share you owned.

HSP is an uninspiring $4.3 billion specialty drug company marketing an impressive range of injectable pharmaceutical and medication systems that deliver drugs intravenously. HSP is a fine company with excellent products, but I don't consider it an attractive investment at $87 a share. There are 13 analysts who follow HSP. One of these lads has a "strong buy" recommendation. Another has a "sell" recommendation. And the remaining 11 just recommend holding HSP.

Management continues to have manufacturing issues at its Rocky Mountain facilities, and ramping up production at its massive new Vizag, India, facility (injectable drugs) is taking a lot longer than management expected. Meanwhile, the patent on Precedex (an important branded anesthetic) expired in mid-2014, and implementation of Obamacare's new medical device tax (including latex gloves, syringes, medical delivery systems, instrumentation, bedpans and maybe even toupees) has also put pressure on earnings.

I think Broker Dan ought to be returned to broker school. My low-level contact with HSP at its Illinois headquarters tells me that the board is not considering a dividend in the foreseeable future. So excluding a potentially impressive acquisition this year or next, HSP's share growth during the coming few years might disappoint you.

Meanwhile, don't sell your shares of ABBV, which recently increased its dividend again, to $1.96, and yields 3.3 percent. Its exciting $55 billion cash and stock deal to take over Ireland's Shire PLC (SHPG-$238) may reduce ABBV's corporate tax rate to 13 percent, add $6 billion to revenues, add $2 billion to net income and expose ABBV's products to new markets. ABBV, a $19 billion-revenue company, is a buy, not a sell.

And your Abbott Labs is also an outstanding pharmaceutical. Abbott Labs is a solid core holding that should consistently grow its sales, earnings and dividends.

I think you should consider replacing Broker Dan, whose cheese seems to be slipping off his cracker. If you're going to own an index ETF for conservative growth, I recommend the S&P 500 ETF (SPY-$205), not the PowerShares QQQ Trust (QQQ-$106), which tracks the Nasdaq 100 index. Broker Dan should know that SPY invests in 500 of the largest issues on the New York Stock Exchange and biggies on the Nasdaq, which include a broad spectrum of various industries. By contrast, QQQ tracks 100 of the largest nonfinancial companies listed only on the Nasdaq. Its significantly less diverse tech firms constitute 60 percent of the securities in the index, and two giant companies, Apple and Microsoft, make up 63 percent of the total value of QQQ. Therefore, when these two big boys falter, so will QQQ.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

© 2015 Creators.com

Published: Tue, Mar 17, 2015

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