Updated on January 30th, 2023 by Nikolaos Sismanis
Abbott Laboratories (ABT) is a very well-known dividend growth stock, and for good reason. The company is a member of the exclusive Dividend Aristocrats, a group of elite dividend stocks with 25+ years of consecutive dividend increases.
We believe the Dividend Aristocrats are among the best dividend stocks to buy and hold for the long-term.
With this in mind, we created a full list of all 68 Dividend Aristocrats. You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:
Abbott is diversified across multiple areas of health care, each of which has positive growth potential for the long term. This has fueled Abbott’s impressive history and will continue to do so in the years ahead. This article will discuss the investment prospects of Abbott Laboratories in detail.
Abbott Laboratories is a diversified healthcare corporation with a market capitalization of $192.2 billion. The company was founded in 1888 and is headquartered in Lake Bluff, Illinois.
The company operates in four main segments: Nutritional Products, Established Pharmaceuticals, Diagnostics, and Medical Devices. Abbott enjoys a leadership position across product segments.
Source: Investor Fact Sheet
The company’s Nutrition Products segment 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 the operating margin has improved each and every year since 2011.
Abbott Laboratories’ last segment is the Medical Devices unit. This segment was significantly bolstered in recent times by the St. Jude Medical acquisition, which has helped grow sales at a high single-digit rate since becoming fully integrated within the company. The company’s high-quality product portfolio and the acquisition of St. Jude should fuel strong growth for the next several years.
Over time, Abbott Laboratories has shown the capability to reliably grow its adjusted earnings-per-share. Abbott Laboratories spun off AbbVie (ABBV) in 2013, and both businesses have performed well since the spin-off. If an investor had held onto their shares in both companies, their combined per-share earnings would be about $19.12 in 2022. This is up significantly from the $4.99 (growth of 13.6% per year) of adjusted earnings-per-share reported by the combined company 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 2019, the percentage of the global population that exceeded the age of 65 was 9.1%. This proportion is expected to reach 16% in 2050.
The second broad tailwind that will benefit Abbott Laboratories is the company’s focus on emerging markets. This is particularly true for its Branded Generic Pharmaceuticals segment.
Many of the countries that this segment is focused on are spending a very small proportion of their overall GDP on healthcare, a rate that is expected to increase in the future.
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 Advantages & 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 five years is shown below:
- 2018 research & development expense: $2.3 billion
- 2019 research & development expense: $2.4 billion
- 2020 research & development expense: $2.4 billion
- 2021 research & development expense: $2.7 billion
- 2022 research & development expense: $2.9 billion
Abbott Laboratories’ investment in research & development shows that the company is willing to play the long game, building out its product pipeline and improving its long-term business growth prospects.
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 (6.7% increase)
- 2009 earnings-per-share of $3.72 (22.8% increase)
- 2010 earnings-per-share of $4.17 (12.1% increase)
Remarkably, Abbott Laboratories managed to grow its earnings-per-share during the global financial crisis – one of the most economically difficult time periods on record. At the same time, the company’s share count increased. This means that Abbott Laboratories didn’t use share repurchases to grow earnings-per-share, they were simply more profitable during a tumultuous time. We expect this recession-resistant Dividend Aristocrat to perform similarly well during future downturns in the business environment.
From a dividend perspective, Abbott Laboratories’ dividend also appears very safe.
Valuation & Expected Total Returns
Abbott Laboratories reported fourth-quarter earnings on January 25th, 2023. For the quarter, the company generated $10.1 billion in sales (58% outside of the U.S.), representing a 12.2% decrease compared to the fourth quarter of 2021. Adjusted earnings-per-share of $1.03 compared unfavorably to $1.32 in the prior year.
Revenue was $410 million better than expected, while adjusted earnings-per share topped estimates by $0.10. For 2022, revenue grew 6.4% to $43.7 billion while adjusted earnings-per-share of $5.34 compared to $5.21 in the previous year.
Source: Investor Fact Sheet
Abbott Laboratories is currently trading at ~$110 per share. Using the midpoint of the company’s guidance for the year gives the stock a price-to-earnings ratio of 25.0
Abbott Laboratories’ price-to-earnings ratio has generally hovered between 20 and 25 over the past five years. The current valuation is on the high end of this range. Despite the company’s innovative product line and ability to grow during difficult economic times, we feel that a fair price-to-earnings ratio of 20 is more appropriate in the current environment. If shares revert to our fair value estimate of 20 by 2028, then valuation would be a 4.4% headwind to annual returns over this period of time.
While right now may not be the best time to purchase shares of Abbott, investors should look for any meaningful downturn in the share price as a buying opportunity, given the high-quality nature of the 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 5% in annual adjusted earnings-per-share growth moving forward.
Lastly, Abbott’s total returns will receive a boost from the company’s dividend payments. After increasing its dividend by 8.5% last December, Abbott Laboratories now has a dividend growth streak of 51 years, preserving its Dividend King status. The company pays a quarterly dividend of $0.51 which yields 1.9% using the current share price.
Overall, Abbott Laboratories’ expected total returns will be composed of:
- 5.0% earnings-per-share growth
- 1.9% dividend yield
- 4.4% multiple reversion
Total expected annual returns are forecasted at just 2.6% through 2028. This is a fairly low expected rate of return due to the overvaluation of the stock at the present time.
Abbott Laboratories has many of the characteristics of an appealing dividend investment. It has a recession-resistant business model that allows it to continue growing earnings-per-share through various economic environments. It also has a long history of steadily increasing dividend payments.
That said, we believe that the stock’s current valuation prevents it from offering meaningful return prospects in the coming years, which is why we rate Abbott Laboratories a sell. We suggest that investors consider this high-quality stock on any notable dips.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: