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Summary

  • Revenues increased, but net earnings decreased before consideration of one-offs.
  • The current dividend is $0.22/share for a yield of 2.2%; payable August 15th to shareholders of record at the close of business on the 15th of July.
  • All revenue segments helped contribute on a yearly and quarterly basis.

The last time I wrote about Abbott Laboratories (NYSE:ABT) I stated:

"Like I said, I will only be buying a small batch this time around, only for the dividend. I think the entire market has shot up far too fast in too short of a time." Since that article was published the stock is down 2.01% while the S&P 500 (NYSEARCA:SPY) is down 0.19% in the same timeframe. It's safe to say that I saved some heartache by not putting on a full position back then. Abbott is engaged in the discovery, development, manufacture, and sale of a portfolio of science-based healthcare products, which operates in four segments: Diagnostics, Medical Devices, Nutritionals and Generic Pharmaceuticals.

The company reported earnings before the market opened on 16Jul14 and on the surface the results were excellent with the company reporting earnings of $0.54 per share (beating estimates by $0.03) on revenue of $5.55 billion (beating estimates by $30 million). The stock decreased 0.29% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Net Sales (in millions)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Nutrition

6%

2%

$1,731

$1,631

$1,703

Diagnostics

6%

5%

$1,189

$1,117

$1,134

Established Pharma

6%

0%

$1,216

$1,151

$1,217

Medical Devices

5%

1%

$1,373

$1,312

$1,357

Vascular Products

3%

0%

$656

$634

$654

Totals, $ in millions

6%

2%

$5,551

$5,244

$5,446

Because the company beat on revenues, I want to see which segments were the main contributors. Fortunately, Abbott is so diversified that all of its segments contribute about the same to the company. On a year-over-year basis, I only really see noise and no real dramatic impact on revenues, and the same goes with the quarterly basis.

Income Statement

Income Statement (in millions)

Q/Q

Y/Y

2Q14

1Q14

2Q13

Net Sales

6%

2%

$5,551

$5,244

$5,446

Cost of products sold, excluding amortization expense

1%

-2%

$2,506

$2,470

$2,545

Amortization of intangible assets

-7%

-18%

$161

$174

$197

R&D

-13%

-8%

$335

$387

$363

Selling, general, and administrative

1%

4%

$1,788

$1,762

$1,714

Total Operating Cost and Expenses

0%

-1%

$4,790

$4,793

$4,819

Operating Earnings

69%

21%

$761

$451

$627

Interest expense, net

-13%

-13%

$20

$23

$23

Net foreign exchange [GAIN]loss

-50%

-91%

$1

$2

$11

Other (income) expense, net

0%

-138%

$3

$3

$(8)

Earnings (loss) from Continuing Operations before taxes

74%

23%

$737

$423

$601

Taxes on Earnings (loss) from Continuing Operations

230%

122%

$277

$84

$125

Earnings (Loss) from Continuing Operations

36%

-3%

$460

$339

$476

Earnings from Discontinued Operations, net of taxes

-83%

N/A

$6

$36

$-

Net Earnings

24%

-2%

$466

$375

$476

Net Earnings from Continuing Operations, excluding specified items

29%

15%

$829

$641

$724

Avg. # of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards

-2%

-4%

1517

1548

1577

Diluted Earnings per Common Share from Continuing Operations, excluding Specified Items

32%

19%

$0.55

$0.41

$0.46

The first line item I noticed on the income statement is that amortization of intangible assets have decreased 18% from the prior year. The next line item I noticed was that total operating earnings increased 21% from last year thanks in large part to increased revenues.

Net interest expenses decreased 13%, or $3 million, while net foreign exchange decreased by 91%, or $10 million. After factoring in a 138% drop in other income, or $11 million, the company earned 23% more from last year on earnings from continuing operations before taxes. Taxes however increased 122% to $277 million which made earnings from continued operations after taxes drop 3% from the prior year. The increase in taxes from last year was due to a tax expense in relation to a one-time repatriation of 2014 ex-US earnings, which was classified as a specified item.

Net earnings decreased 2% from last year after all of this, but when we add net earnings excluding specified items we get a 15% increase and the 4% share reduction helped increase earnings per share by 19% from last year. The net earnings excluded an after-tax charge of $369 million for intangible amortization expenses, expenses related to cost reduction initiatives, and current quarter tax expenses associated with the repatriation of earnings.

Conclusion

The company reported earnings, which were 19% higher than a year before on slightly higher revenue, while the share price was up 6.96% since the first quarter earnings announcement. I don't believe the company needed to reduce the outstanding shares during the quarter because I always felt it was close to fairly valued, but it is what it is. I definitely like that revenue increased from last year, but I don't like that earnings were down before considering the excluded items. Something which concerns me is that R&D spending has decreased from last year and last quarter. When a company is cutting costs, like what Abbott is doing, I don't like to see it being taken from R&D.

Other bright spots of the report include gross profit increasing to $3,045 (or 5% from last year) thanks in large part to a decrease in cost of goods sold, which in turn helped gross margins increase by 3%. The company also did announce that it was going to increase 2014 earnings guidance to a range of $2.19 to $2.29 from a previous range of $2.16 to $2.26. You would think that since the company beat on the top and bottom lines, and increased earnings guidance that the stock would be flying high on a day that the S&P 500 jump 0.42%, right? Wrong, it dropped 0.29% and makes me continue to only buy the stock on a cautious basis.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Abbott Laboratories Declared Its 362nd Quarterly Dividend, But Earnings Were Mediocre