From a sector-by-sector perspective, I am particularly bullish on health care going forward. The reason is because of demographics. The U.S. is an aging population. The Baby Boomers, those born in the years following World War II, total 75 million in the United States. Baby Boomers are the second largest generational group, only slightly behind the Millenials. With millions of people retiring each year, the aging population presents a tailwind for the health care sector that should result in sustained, long-term growth.
Therefore, I've been increasingly adding stocks to my portfolio that I believe will benefit from the demographic trends. Specifically, I wrote in this article that I recently added Gilead Sciences (NASDAQ:GILD) to my portfolio. I also own health care REITs HCP (NYSE:HCP) and Welltower (NYSE:HCN), and I own some shares of GlaxoSmithKline (NYSE:GSK) as well. These purchases were made based on that same thesis-and I'm still on the hunt for other well-run health care stocks with strong cash flow and above-average dividends.
With that in mind, my research has pointed me to a new health care stock I don't yet own: Abbott Laboratories (NYSE:ABT).
Why Abbott Crosses my Radar
I am bullish on Abbott Labs for a two key reasons: it has a diversified business across multiple health care segments, and it will be one of the major beneficiaries of the aging U.S. population. It has four major businesses-nutrition, diagnostics, medical devices, and pharmaceuticals--each of roughly equal size. After seeing the sell-off in biotech stocks over the past year, due to intensifying scrutiny over drug pricing, I'm focusing my attention on diversified health care companies that aren't completely reliant on pharmaceuticals. Led by Ensure, Abbott controlled more than 50% of global sales of adult nutrition products last year.
In addition, Abbott is diversified geographically. Half of its revenue comes from mature markets like the U.S., while the remaining half is derived from under-developed economies such as emerging markets. This will allow Abbott to participate in growth areas such as aging populations, in the United States and also emerging markets where health care spending is projected to rise at a faster pace than GDP. At the same time, Abbott's focus on higher-growth areas of the world helps protect its pharmaceutical portfolio against the likelihood of increased regulatory intervention in drug pricing in the U.S.
According to Abbott, emerging markets are projected to see a 9% annual increase in pharmaceutical product sales from 2015-2019. In the same period, developed markets are expected to grow just 3%. This will be an advantage for Abbott because it generates 21% of its emerging market sales from India, 7% from China, and 32% from Latin America.
Abbott's strategy doesn't appear to be working, judging by its fundamental performance last year, but its real performance was much better than it seemed. Abbott's sales grew just 0.8% in 2015, but due to the company's significant international business, its results were weighed down by the strong U.S. dollar. Unfavorable currency fluctuations shaved more than eight percentage points off of Abbott's revenue growth last year. Excluding foreign exchange, Abbott's organic revenue growth was a much more satisfactory 9% last year. Organic sales in emerging markets rose 17% last year, which is very promising for the future.
In addition to its organic growth, Abbott's future growth will be fueled by acquisitions. It recently acquired St. Jude Medical (NYSE:STJ) in a massive $25 billion deal. The acquisition further boosts Abbott's position to capitalize on the aging U.S. population because St. Jude is a leader in the medical device market, specifically in the areas of cardiovascular, diabetes, and vision related devices. Abbott expects the deal to be accretive to earnings in the first year after closing with earnings growth accelerating thereafter. It also expects to realize $500 million in annual cost synergies by 2020. Separately, Abbott also acquired Alere Inc. (NYSE:ALR) for $5.8 billion in February, further enhancing its diagnostics business. Again, Abbott expects the deal to be immediately accretive to annual earnings.
Abbott: Extremely Attractive for Value & Dividends
Abbott is a Dividend Aristocrat, a select group of companies that have increased their dividends for at least 25 consecutive years. In fact, Abbott has declared 370 consecutive quarterly distributions, a streak going all the way back to 1924, and the company has raised its payout for the past 44 years in a row, including an 8% hike last year. Such a long history of uninterrupted dividend payments and annual dividend growth is a testament to the staying power of Abbott's business model. Abbott's $1.04 per share annualized dividend works out to an attractive 2.7% dividend yield based on its current share price. This is significantly higher than the S&P 500 average yield of slightly more than 2%.
Last year, Abbott earned $2.15 per share in adjusted profit. The stock trades for 17 times last year's adjusted EPS. Based on its strategic initiatives and acquisitions, future earnings are likely to grow from here, which means Abbott's valuation looks modest. Abbott looks like a very attractive stock for value and income.
Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.
Disclosure: I am/we are long HCP, HCN, GILD, GSK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.