Abbott Laboratories (ABT) is engaged in the discovery, development, manufacture, and sale of a portfolio of science-based health care products which operates in four segments: Diagnostics, Medical Devices, Nutritionals and Generic Pharmaceuticals. On July 17, 2013, the company reported second-quarter earnings of $0.46 per share, which beat the consensus of analysts' estimates by $0.02. Since last writing about the stock back on July 5, 2013, the stock is down 2.19% excluding dividends (down 1.8% including dividends), and is losing to the S&P 500, which has gained 2.46% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying some more of the company right now for the healthcare sector of my dividend portfolio.
Abbott currently trades at a trailing 12-month P/E ratio of 13.34, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.02 is currently fairly priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.23 per share. The 1-year PEG ratio (1.18), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 11.22%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. Abbott pays a dividend of 1.67% with a payout ratio of 36.3% of trailing 12-month earnings (or 32% based on free cash flow) while sporting return on assets, equity and investment values of 7.4%, 16.3% and 1.3%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 1.67% yield of this healthcare company is good enough for me to take shelter in for the time being.
Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in oversold territory with a value of 33.52 with upward trajectory, which is a bullish pattern. To confirm that, I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is below the red line, possibly about to cross above the red line with the divergence bars increasing in height to the upside indicating the stock is about to have upward momentum. As for the stock price itself ($33.50), I'm looking at $34.54 to act as resistance and $32.02 to act as support for a risk/reward ratio, which plays out to be -4.41% to 3.1%.
- On September 4 Jeffries reiterated its "buy" rating on Abbott but cut its price target and earnings per share but stated, "…friendly capital allocation toward debt repayments, share repurchases and dividends."
- Dr. Reddy's Labs (RDY) has launched a generic version of Abbott's Depakote ER mood stabilizers which should cut into Abbott's revenues. Mood stabilizers (generic and proprietary) combined for US sales of roughly $194 million for the most recent twelve months ending June 2013.
Abbott is fairly valued based on future earnings and on future growth prospects (one-year outlook). Financially, the dividend payout ratio is low based on trailing 12-month earnings and on free cash flow, but I don't doubt management will be able to continue to increase the dividend going forward; based on future earnings the dividend payout ratio goes down to around 25% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some upward pressure. The bullish technicals, earnings growth and safe dividend are what I like about the company. I know this stock does not qualify for some of the dividend growth investors out there because the yield isn't high enough, but every great company has to begin somewhere. Also, if you were fortunate enough like I was to own Abbott before the spin-off of Abbvie (ABBV) and you held onto Abbvie you are getting rewarded handsomely from that perspective with a 3.65% yield and 25.4% capital appreciation since the split.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!