Published October 9th, 2017, by Nick McCullum
Abbott Laboratories is a very well-known dividend growth stock, and for good reason.
The company is a member of the exclusive Dividend Aristocrats list, a group of elite dividend stocks with 25+ years of consecutive dividend increases.
The following infographic contains additional details about the importance of investing in quality dividend stocks and how Abbott Laboratories fits into this framework for self-directed investors.
The remainder of this article will discuss the investment prospects of Abbott Laboratories in detail.
Abbott Laboratories is a diversified healthcare corporation with a market capitalization of $95.6 billion. The company was founded in 1888 and is headquartered in Lake Bluff, Illinois.
The company operates in four main segments:
- Nutritional Products
- Branded Generic Pharmaceuticals
- Medical Devices
The company’s nutrition segment is characterized by market leadership. It is the #1 pediatric nutrition provider in the United States and some other geographies. Moreover, the segment’s performance has improved considerably in recent years as operating margin has improved in each and every year since 2011.
The company’s branded generic pharmaceuticals segment is entirely focused on the emerging markets, with an emphasis on BRIC countries (Brazil, Russia, India, and China).
The company’s Diagnostics segment is more geographically diversified than the branded generic pharmaceuticals segment. About 30% of the company’s revenue is generated in the United States while 30% is generated in non-US developed markets and 40% is generated in emerging markets. Similar to the Nutrition segment, the Diagnostics segment has seen significant operating margin improvements over the last several years.
Abbott Laboratories’ last segment is the Medical Devices unit. This segment was bolstered significant in recent times with Abbott Laboratories’ acquisition of St Jude Medical, which helped to segment to grow sales by nearly 90% in the most recent quarter.
Clearly, Abbott Laboratories operates a highly diversified business model with a presence in many different sectors of the healthcare industry.
The next section will discuss the company’s growth prospects in detail.
Over time, Abbott Laboratories has shown the capability to reliably grow its adjusted earnings-per-share over time. The company’s adjusted profits per share over the past decade are shown below.
Source: Value Line
Note that Abbott Laboratories spun-off AbbVie (ABBV) in 2013, which explains the sharp drop-off in apparent earnings. Make no mistake; both businesses have performed well since the spin-off. Today, if an investor held onto their shares of both companies, their per-share earnings would total $7.02. This is up significantly from the $4.99 (growth of 8.9% per year) of adjusted earnings-per-share reported by the pre-spin-off Abbott Laboratories in 2012.
Looking ahead, Abbott Laboratories has two major growth prospects that will help its business to become increasingly more profitable over the years to come.
The first is the aging population, both domestically and within the United States. In 2015, the percent of the global population that exeeding age 65 was 8.5%. This proportion is expected to nearly double over the next thirty-five years, to 16.7% in 2050.
Source: Abbott Laboratories Presentation at the 2017 JP Morgan Healthcare Conference, slide 5
The second broad tailwind that will benefit Abbott Laboratories is the company’s focus on the emerging markets, which is particularly true for its Branded Generic Pharmaceuticals segment.
Many of the countries that this segment is focused on spend a very small proportion of their overall GDP on healthcare, a rate that is expected to increase in the future.
Source: Abbott Laboratories Presentation at the 2017 JP Morgan Healthcare Conference, slide 6
The aging domestic population combined with the rather low focus on healthcare spending in emerging market countries should leave Abbott Laboratories plenty of room to grow for the foreseeable future.
Competitive Advantage & Recession Performance
Abbott Laboratories’ competitive advantage is two-fold.
The first component is its remarkable brand recognition among its consumer medical products, particularly in its Nutrition segment. Led by noteworthy products like the Ensure meal replacement supplement, Abbott Laboratories brands allows its sales to stand strong through even the worst economic recessions.
The second component of Abbott’s competitive advantage is its focus on research and development. The company’s R&D expense over the last several years is shown below:
- 2014 research & development expense: $1.3 billion
- 2015 research & development expense: $1.4 billion
- 2016 research & development expense: $1.4 billion
Abbott Laboratories’ investments into research & development show that the company is willing to play the long game, building out its product pipeline and improving its long-term business growth prospects.
Abbott also has a competitive advantage that comes from its laser-sharp focus on shareholder value. In many ways, this starts at the top of the business via the leadership of Miles D. White. Mr. White, a Stanford-educated mechanical engineer and businessman by training, is nearing his 20-year anniversary as Abbott’s Chief Executive Officer. Importantly, Abbott has dramatically outperformed the broader stock market during White’s tenure:
As a large, diversified healthcare business, Abbott Laboratories is extraordinarily recession-resistant. The company actually managed to increase its adjusted earnings-per-share during each year of the 2007-2009 financial crisis.
- 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
Abbott Laboratories remarkably managed to grow its earnings-per-share during the global financial crisis – one of the most economically difficult time periods on record. We expect this recession-resistant Dividend Aristocrat to perform similarly well during future downturns in the business environment.
Valuation & Expected Total Returns
When Abbott Laboratories reported second-quarter earnings in July, the company updated its full-year adjusted earnings-per-share guidance to $2.43-$2.53 (up three cents from $2.40-$2.50 previously). This performance forecast gives investors a benchmark by which to assess the company’s current valuation.
Abbott Laboratories is currently trading at $55/share. Using this price combined with the midpoint of the company’s new guidance ($2.48) gives a price-to-earnings ratio of 22.2.
The following diagram compares Abbott Laboratories’ current valuation to its long-term historical average.
Source: Value Line
Abbott Laboratories’ current valuation is noticeably higher than its long-term average. While right now may not be the best time to purchase shares of this high-quality business, total return may still be satisfactory particularly when adjusted for the low-risk nature of Abbott’s business model.
The other major component of Abbott Laboratories’ future total returns will be the company’s earnings-per-share growth. As we’ve seen, the company has a proven ability to grow earnings in the high-single-digits each year. We expect that this growth is likely to continue and investors can reasonably expect 7%-9% adjusted earnings-per-share growth moving forward.
Lastly, Abbott’s total returns will receive a boost from the company’s dividend payments. Abbott Laboratories currently pays a quarterly dividend of $0.265 which yields 1.9% on the company’s current stock price of $55.
In sum, Abbott Laboratories’ expected total returns will be composed of:
- 7%-9% earnings-per-share growth
- 1.9% dividend yield
for expected total returns of 8.9%-10.9% before the (likely negative) impact of valuation changes.
Abbott Laboratories has many of the characteristics of an appealing dividend investment:
- A recession-resistant business model that allows it to continue growing earnings-per-share through various economic environments
- A long history of steadily increasing dividend payments
- Robust growth prospects to drive shareholder returns well into the future
While the company’s current valuation exceeds its long-term average, Abbott Laboratories remains a strong hold and we recommend that investors buy this high-quality stock on any notable dips.