Published November 3rd, 2016 by Bob Ciura
Abbott Laboratories (ABT) is a major healthcare company with a long operating history. Abbott started all the way back in 1888, when physician and drug store owner Dr. Wallace C. Abbott started making his own scientifically formulated medications with the goal of improving patient care.
In the many decades since, Abbott has grown into a $57 billion company by market cap, with more than $20 billion in annual sales.
Abbott is a tried-and-true dividend stock. The company has paid 371 consecutive quarterly dividends, without interruption. That is a 92-year streak of consistent dividends.
The company also spun-off fellow dividend growth healthcare stock AbbVie (ABBV) in 2013. AbbVie currently has a 4.0% yield – which is especially high for an established health care business.
And, Abbott has increased its shareholder payout in each of the past 44 years. This makes Abbott one of only 50 Dividend Aristocrats – stocks with 25+ years of rising dividends. You can see the list of all 50 Dividend Aristocrats here.
With a 2.7% dividend yield, Abbott stock is a worthwhile consideration for dividend growth investors. Keep reading this article to learn more about the investment prospects of Abbott.
Abbott’s business model is broken up into four operating segments. These are:
- Nutrition (34% of total sales)
- Medical Devices (25% of total sales)
- Diagnostics (23% of total sales)
- Pharmaceuticals (18% of total sales)
The company has a strong foothold in each of its four categories. In the nutrition business, its core brands include Ensure, Glucerna, and Similac. Abbott launched 38 new nutrition products last year alone.
The medical devices segment includes Abbott’s vascular, medical optics, and diabetes care businesses. Each of these businesses generates at least $1 billion in annual revenue.
Source: 2015 Annual Report, page 23
In the diagnostics business, Abbott operates several key brands, with six new systems in development for future growth.
Source: 2015 Annual Report, page 27
Abbott’s pharmaceuticals business has more than 1,500 products in its portfolio. It sells pharmaceutical products in more than 90 countries around the world.
Abbott’s fundamentals are quite strong. Its organic revenue, which excludes the impact of foreign exchange, grew 9.1% last year. Earnings-per-share, adjusted for one-time costs and divestitures, increased 9% in 2015.
The company’s performance this year is also strong. Organic revenue increased 5.2% through the first nine months of 2016.
A very promising growth catalyst for Abbott moving forward is expansion in the international markets. Approximatly 69% of Abbott’s sales come from outside the U.S.
Source: 2015 Annual Report, page 31
Within its international business, Abbott has placed particular focus on emerging markets. This is a good strategy, since health care spending and economic growth in under-developed regions is likely to exceed that in developed markets like the U.S. and Europe.
In addition to its geographic focus, the other major growth catalyst for Abbott is its product focus. Abbott has positioned its product portfolio specifically to capitalize on the aging global population. Abbott’s nutrition business is its largest operating segment, and for good reason.
According to Abbott, the 65 and over population will increase 180% by 2050.
Abbott has achieved what it believes to be an optimal portfolio mix, largely through acquisitions and divestitures. For example, Abbott acquired St. Jude Medical this year for $25 billion. The acquisition instantly boosts Abbott’ medical devices business.
Analysts on average expect Abbott to grow earnings-per-share by 2.3% this year. Growth is expected to accelerate to 11% in 2017.
Competitive Advantages & Recession Performance
A key competitive advantage for Abbott is its strong brand portfolio. Abbott enjoys a leadership position across each of its four operating segments, particularly in nutrition. Led by its flagship Ensure product, Abbott controls more than 50% of the adult nutrition category.
Abbott’s diversification is another competitive advantage. The company offers more than 10,000 products, which encompass all stages of life.
Source: 2015 Annual Report, page 12
Going forward, it will be critical for Abbott to continue investing in R&D, to keep competition at bay. Last year, Abbott increased R&D expense by 4.5%. to $1.41 billion. This is strategically important for the company, to ensure innovation.
As a global healthcare giant with significant scale, Abbott is highly profitable. It remained highly profitable during the Great Recession. The company actually managed to grow earnings-per-share during the depths of the recession:
- 2007 earnings-per-share of $2.84
- 2008 earnings-per-share of $3.03
- 2009 earnings-per-share of $3.72
- 2010 earnings-per-share of $4.17
From 2007-2010, Abbott increased earnings-per-share by 47%. Few companies can match that kind of growth during one of the deepest recessions in history. Abbott has a highly recession-resistant business model, which is another competitive advantage.
Valuation & Expected Total Return
Abbott stock has an adjusted price-to-earnings ratio of around 20. The stock is considerably cheaper than the S&P 500 Index, which has an average price-to-earnings ratio of 24.5. Abbott investors buying in at the current price may see significant value creation through multiple expansion.
Aside from an expanding price-to-earnings ratio, Abbott’s future expected returns will be made up of the following:
- 8%-10% earnings-per-share growth
- 2.7% dividend yield
Earnings-per-share growth will be achieved through a combination of revenue growth and share repurchases. Revenue could realistically increase 6%-8% per year on an organic basis, plus additional bolt-on growth through acquisitions. Abbott will also continue to repurchase shares, likely at a rate of 1%-2% per year.
As a result, it is reasonable for investors to expect 10.7%-12.7% annualized returns, plus or minus any expansion or contraction of the price-to-earnings ratio.
Abbott has struck a good mix among its product portfolio. It is highly diversified and has a strong presence in stable categories. This should provide the company with consistent growth so that it can continue increasing its dividend each year.
Abbott has increased its annual dividend consecutively for more than four decades. It also raises its dividend at high rates from year to year. This year, Abbott hiked its dividend by a healthy 8.3%.
It is likely that the company can continue increasing its dividend by high-single digit rates moving forward. It has a modest payout ratio. Going by adjusted earnings-per-share, Abbott distributes slightly less than half of its annual profits.
As a result, Abbott stock looks like a solid buy for dividend growth investors. The company garners a high rank using The 8 Rules of Dividend Investing thanks to its reasonable payout ratio, above average dividend yield, solid total returns, and stability.