Warren Buffett Just Sold This Popular Stock – Should You?
When it comes to investment success, Warren Buffett is hard to top, to say the least. But even if you can’t beat him, you might be able to get (roughly) similar returns by copying his trades or at least avoid some problems by selling when he does.
On that note, in the first quarter of this year, the Oracle of Omaha company, Berkshire Hathaway (BRK.A -0.46%)sold 100% of its three million AbbVie (ABVV 0.34%) shares with a total value of approximately $410 million. Contrary to his stated preference to hold stocks for extraordinarily long periods of time, Buffett didn’t establish his position in the company until the third quarter of 2020. And his stake was only about 0.1% of Buffett’s portfolio. Berkshire Hathaway, so it was never exactly a core. holding.
Still, if a stock isn’t good enough for Warren Buffett, it’s reasonable for investors to wonder if they should head for the door as well. Let’s analyze what might have motivated him to see if it’s relevant to you.
What could have motivated Buffett to sell?
For the uninitiated, AbbVie is one of the largest pharmaceutical companies in the world by market capitalization, at approximately $266 billion, and it generated more than $56 billion in revenue in 2021 alone. It is solidly profitable and its revenue over the last 12 months has increased by more than 112% in the last five years. Additionally, its quarterly free cash flow (FCF) increased by 153% over the same period. And to top it off, his total stock return at that time was 175%, beating the market return by about 85%.
However, there are some things that Buffett probably never liked much about the stock. First, AbbVie’s debt load of $73.6 billion is quite high. Only about $9.9 billion of this debt is current. And the company is also making progress in paying down its long-term debt; its net issuance of debt over the past 12 months shows a repayment of nearly $11.3 billion.
But from Buffett’s perspective — and he’s right — there are plenty of other companies that don’t need to spend about half of their free cash flow on deleveraging. This means that these alternatives could probably develop faster.
According to Buffett, value should be retained and reinvested within organizations as much as possible. This is another problem he might have with AbbVie because he pays a dividend and spends money to buy back shares of his shares. By distributing excess profits to shareholders, the company gives away resources that could be channeled into growth, which somewhat undermines its long-term value.
Additionally, dividends are tax inefficient (another of Buffett’s pet peeves) because shareholders are taxed on both company income and their personal distribution via capital gains. Additionally, AbbVie management prioritizes increasing the dividend over time, and the payout has increased 120% over the past five years. Continuing this trend might please shareholders, but it’s a signal to Buffett that there may be underinvestment in the company’s growth.
Probably the biggest and final nail in the coffin of Buffett’s AbbVie holdings was falling revenue from Humira, the company’s flagship 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 due to expire in 2023, and its international sales are already collapsing rapidly.
AbbVie has a pair of other drugs that it says should be able to recoup Humira’s market share and total revenue so the company can continue to grow, but Buffett may be skeptical of this plan.
Your situation may be different from Buffett’s
If you’re investing in AbbVie to capture its ever-increasing dividends or its relatively steady growth from bringing new drugs to market, it might not make sense to follow Warren Buffett’s lead and sell your shares. Nor should Buffett’s exit deter you from buying a few stocks for the first time for some extra income.
On the other hand, if you intend to follow its value investing approach to a T, it’s true that AbbVie has enough flaws that, taken together, can be a deal breaker.
Just be aware that to be a true student of Buffett, you should probably wait to sell at least as long as it takes for the sale to register as long-term capital gains rather than short-term capital gains. This would allow you to avoid the higher tax rate – which Buffett wouldn’t be a fan of even stepping out.