Seeking Alpha
Research analyst, contrarian, special situations, deep value
Profile| Send Message|
( followers)  

It has been a year since Abbott Laboratories (NYSE:ABT) completed the spin-off of its branded pharmaceutical business, establishing AbbVie (NYSE:ABBV) as a separate company. What remains with Abbott is still a global healthcare company with a portfolio of offerings focused in diagnostics, medical devices, nutritionals and branded generic pharmaceuticals. The stock was up ~20% in 2013, and dividend investors were rewarded with a huge dividend increase as well.

Despite reporting solid results, the stock has sold off ~8% in the week following its earnings release. However, I believe Abbott continues to be an attractive company for long-term, dividend-growth investors.

Recent Earnings Results

Abbott recently reported fourth-quarter revenues of $5.66B worldwide, up 0.4% on the year before, but below consensus estimates of $5.72B. However, a stronger dollar lowered the value of sales in overseas markets. Removing this unfavorable foreign exchange effect we see that sales would have grown 3.3% (operational basis).

Source: Abbott Press Release

Consistent with third-quarter results, sales growth in the fourth quarter was driven by Diagnostics and Medical Devices. Worldwide Diagnostic sales grew 5.9%, driven by strong growth in Core Laboratory and Point of Care Diagnostics sub-divisions.

Worldwide Nutrition, which is split almost evenly between Pediatric Nutrition and Adult Nutrition, declined 0.8% compared to fourth quarter last year. Abbott issued a voluntary recall on pediatric nutrition products in some international markets this past August, causing a disruption in sales. Removing currency effects, Nutrition grew 1.1% this quarter. However, this is very low considering that Nutrition has typically been a high-growth segment of Abbott's product mix.

The company reported diluted per share of $0.58, up 22% from the prior year quarter and clearly a very strong result. Despite the recall and challenges in its generics business (which I previously discussed), Abbott was still able to post strong growth on both the top and bottom line.

Looking Ahead

Abbott also issued its EPS guidance for the coming year, which was in line with analysts' expectations. However, Abbott's forecast for first-quarter earnings was significantly below analysts' expectations for the quarter ($0.34-$0.36 vs. $0.48 respectively). I believe this is what caused investors to grow concerned, and in turn led to a selloff in the stock.

In addition, nutrition sales have definitely taken a hit, and Abbott's generics business is under pressure overseas. So there are some clear risks that investors should be accounting for when they evaluate the stock.

However, Abbott issued ongoing EPS guidance for the full-year 2014 of $2.16 to $2.26. Not only is this in line with analysts' forecasts, it would translate into double-digit growth in the coming year. I believe this is a positive sign, especially considering the following comment from Abbott's CEO, Miles White:

In 2014, we are targeting another year of double-digit ongoing earnings-per-share growth.

Dividend Growth

Abbott is a Dividend Aristocrat, an index of S&P 500 companies that have annually increased their dividends for 25 consecutive years. In this most recent year, Abbott increased their quarterly common dividend payment by 57%, to $0.22 per share. However, Abbott maintains a relatively low payout ratio of 38% based on current earnings. So Abbott's earnings should easily cover the dividend going forward, and the company may have room to expand it by simply raising their payout ratio.

In addition, Abbott projects an increase in its share repurchases to more than $2 billion in 2014. This will have a net positive effect for dividend-growth investors. By reducing the share count, Abbott could continue paying the same total amount in dividend payments, but the per share dividend would be higher for investors who continue to hold shares in the company.

Conclusion

The combination of strong, double-digit earnings growth, share repurchases, and a conservative dividend payout ratio, leads me to believe that Abbott can continue to build on its impressive history of steady dividend payments and increases. Furthermore, the stock is not overly expensive considering its PE ratio is currently below 15. Therefore, I believe long-term, dividend-growth investors should certainly give this stock a closer look.

Source: Abbott: This Dividend Stock Reported 22% Earnings Growth

Additional disclosure: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the dividend growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.