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Summary

  • 40% of Abbott Laboratories' growth comes from emerging markets.
  • The company has paid increasing dividends for 42 consecutive years.
  • Abbott Laboratories 1st quarter sales were lackluster.
  • The company is very shareholder-friendly.
  • Abbott Laboratories is growing international adult nutritional sales at 12.4%.

Abbott Laboratories (NYSE:ABT) designs, manufacturers, and produces several health-related products. The company manufactures pharmaceuticals, diagnostic systems and tests, nutritional products, and products for the treatment of vascular problems.

The company has a long history of profitable growth. Abbott Laboratories has increased its dividend payment for 42 consecutive years, paid dividends quarterly since 1924, and has been in business over 125 years. The company has managed its impressive streak of growth through constant innovation and diversification, both across healthcare industries and globally.

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Source: Abbott Laboratories Fact Sheet

Current Events

Abbott Laboratories' constant currency sales increased 0.5% for the year-over-year period ending in the first quarter of 2014. The biggest brings spot for Abbott is its international adult nutritional sales (Ensure is its primary brand), which grew 12.4% in constant currency sales. International pediatric nutritional products performed the worst for the quarter, decreasing by 7.7% in constant currency sales. Overall, the company's first-quarter results were somewhat disappointing.

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Source: Abbott Laboratories 1st Quarter 10Q

The companies slow earnings growth is not likely to continue. Management expects revenue growth in the mid-single digits for 2014, even after a somewhat lackluster first quarter. The business has excellent long-term growth prospects.

Abbott Laboratories will benefit from 2 macro-economic trends: the aging of developed nations, and the rapid growth of emerging markets. The company currently generates approximately 40% of its revenue from emerging markets, as compared with 30% of revenue in the US. As these nations move up the income ladder, one of their first priorities is to expand healthcare. Abbott Laboratories is particularly well-positioned to benefit from the growth of consumer power in emerging markets. The company expects 75% of its pharmaceutical revenue to come from emerging markets over the next several years.

Today, less than 25% of the world's population is over 50. The United Nations expects about 40% of the world's population to be over 50 by 2050. The aging of the world's population benefits Abbott Laboratories as more people require medical care and treatment.

Source: 2013 Annual Report

Shareholder Return

Shareholders of Abbott Laboratories can expect a return of 8% to 10% going forward from dividends (2%), share repurchases (2%), and organic growth (4% to 6%). The company's favorable macro-economic tailwinds will push the business to continue to grow.

Valuation

Abbott Laboratories appears to be fairly valued based on its P/E ratio, compared to its peers.

Ticker

Company

P/E

(NYSE:MDT)

Medtronic, Inc.

20.54

(ABT)

Abbott Laboratories

28.88

(NYSE:SYK)

Stryker Corp.

42.47

(NYSE:STJ)

St. Jude Medical, Inc.

25.55

(NYSE:ZMH)

Zimmer Holdings, Inc.

24.09

(NYSE:BSX)

Boston Scientific Corporation

48.81

(NYSE:SNN)

Smith & Nephew plc

29.39

(NASDAQ:ISRG)

Intuitive Surgical, Inc.

27.75

(NYSE:VAR)

Varian Medical Systems Inc.

20.98

(NYSE:EW)

Edwards Lifesciences Corp.

28.93

(NYSE:RMD)

ResMed Inc.

22.40

Source: Finviz

The company has a high P/E ratio relative to the overall stock market and its historical P/E ratio. Abbott Laboratories has a long growth runway, but it is unlikely the company will be able to grow quickly enough to justify such a high earnings multiple. I believe Abbott Laboratories to be somewhat overvalued at this time.

Consecutive Years of Dividend Increases

Abbott Laboratories has increased its dividend payment for 42 consecutive years. Further, the business has paid quarterly dividends for 90 years since 1924. Interestingly, Abbott Laboratories encourages dividend investing on the company's investor relations page through a 1-page PDF document. Businesses with a long history of dividend increases show profitable growth and a shareholder-friendly management; two keys integral to long-term returns.

Why it Matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Abbott Laboratories currently yields 2.19%, ranking it at 65 out of 112 businesses with 25+ years of dividends without a reduction. The company's dividend yield will increase if/when the company's valuation multiple drops.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Abbott Laboratories currently has a payout ratio of 63.25%. The company's payout ratio increased significantly after the recent large dividend hike. The company compares unfavorably to other businesses with 25+ years of dividends without a reduction, ranking at 83 out of 112 based on this metric.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Abbott Laboratories recent spin-off makes it difficult to judge the company's historical long-term growth rate. Abbott's expected future revenue per share growth rate of 6% to 8% (includes share repurchases) ranks it at 26 out of 112 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Abbott Laboratories has an exceptionally low standard deviation of only 19.84%. The company's diversification across healthcare categories, as well as geographic diversification helps insulate the company from downturns in any one segment. The company compares very favorably to other stocks with a long history of dividend payments based on this metric, ranking at 12 out of 112.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

Abbott Laboratories ranks at 25 out of 112 high-quality dividend stocks, using the 8 Rules of Dividend Investing. Abbott's future is bright due to its exciting future growth prospects and excellent diversification across healthcare categories. Further, the company's management has proven to be shareholder-friendly, with a long history of dividend payments, the recent spin-off of AbbVie (NYSE:ABBV), and increasing share repurchases.

Abbott stock currently trades at a higher multiple than other high-quality dividend stocks, which is why the company does not rank higher. Abbott is a hold at this time. When/if valuation multiples reduce somewhat, the company will be a buy, as long-term prospects are bright.

Source: What 2 Macro Trends Are Propelling Abbott Laboratories?