The pharmaceuticals industry is just like the food and beverage industry in terms of sensitivity. This is because it produces products for human consumption, which makes it the main source of income. Abbott Laboratories (ABT) is one major beneficiary of this kind of income and so is a victim of the dangers associated with the business. In November 2011, a law suit was filed against the company with regard to the Depakote drug, which is viewed to have caused various side effects. In February, the drug was in the mix again as yet a new law suit was filed with relation to its effects on human consumption. The pharmaceuticals industry is quite a lucrative one in the U.S as you will learn through several press releases from various news media. Some claim that sales are recorded to the tune of $300 billion annually, a figure that should entice investors to buy Abbott stock.
An Analytical Overview of Abbott
Abbott's forward annual dividend yield is rated at 3.40% as reported in the last financial year results with a forward annual dividend rate of $2.04 per share. The dividend yield is not the highest in the industry but the dividend rate is very impressive as it is way above the rest in the industry. This means that the stock is fairly priced and therefore less prone to speculation. Close competitors such as Merck (MRK) and Johnson & Johnson (JNJ) had a dividend yield of 4.40% and 3.60% with dividend rate of $1.68 and $2.28 per share, respectively. Sanofi, (SNY), another competitor, had a forward annual dividend yield of 4.90%, the highest reported in this industry, and a forward annual dividend rate of $1.76 per share. The various dividend rates are a subject of a certain level of payout from the reported earnings per share. Merck has the highest payout ratio of 77% while my focus stock Abbott pays at a payout ratio of 62%. Johnson & Johnson on the other hand pays at a ratio of 64% while Sanofi is the lowest at only 48%. This gives you a clear picture of how much I should expect upon prospecting the future earnings per share.
Abbott is one of the few companies with a consistent payment of dividends. I cannot perceive a single period the company failed to pay dividends over the last couple of decades. To make matters even more interesting, the company has been paying the dividends on a certain incremental sequence almost unbeatable given the turbulent business environment that includes challenges as the ones it is currently facing. This should give the investors the confidence that even despite the current law suits, dividends are guaranteed and so are capital gains in the long run. The growth in dividend suggests a growth in the company as a whole and this should trickle down to growth in your return on the stock.
Many companies more than often struggle to run at the optimal cost of capital. This simply means attaining a balance between the amount of debt used and the amount invested in the form of equity. First and foremost, it is of great importance to note that either extreme is considered unhealthy for the company and hence the need to strike a balance. There are several theories that suggest certain levels of debt and equity but in my own understanding, it all depends on the type of industry the company operates. For instance, the level of debt considered safe for financial institutions is lower than that for pharmaceuticals industry. With this in mind, the debt-to-equity ratio of 62.85 ensures that the company capitalizes on the tax allowable cost of debt in the form of interest expense while at the same time making sure that the stockholders do not lose control to the creditors.
Sanofi on the other hand showed some shrewdness in its acquisition of debt by keeping it 27.43, while Merck feels 30.76 is a good level to work with. Johnson & Johnson on the other hand had 34.49 while Roche Holding AG (RHHBY.PK) had the highest of levels with 185.42.
Abbott profit margin is not the best compared with the majority of its competitors. Roche Holdings has a very impressive figure of 21.8% profit margin and 32.92% operating margin compared with Abbott's 12.17% profit margin and 20.90% operating margin. Sanofi and Merck are not really far off from Abbott as they reported a16.24% profit margin with an operating margin of 21.73% and a 13.05% profit margin and an operating margin of 21.99%, respectively. Johnson & Johnson managed to record a profit margin of 14.87%, still better than Abbott and an even better operating margin of 24.97%.
Different News and Events with Different Impacts on Abbott
All investors are always on the lookout for news impacting on the status of the prospective stock and even the stock they have in their portfolio. While it is not good to focus on the negative aspects only, it is good for precautionary purposes. A lot has been said about Abbott in recent past and toward the close of 2011. The cases to do with drug side effects made the headlines late last year the same came to light again in February, something that could deter some investors from purchasing the stock or lead to panic selling. But as I have always emphasized, law suits are always contingent liabilities until the final ruling and even after this, the risk of any material direct financial loss is never automatic.
Nevertheless, it is always good to also look at the positives toward a stock in order to make the right judgment and Abbott has plenty of those in relation to recent news and events. The signing of the deal with Galapagos to for development of an oral next generation inhibitor after which the drug becomes ready for sale and distribution on the market should be a real catalyst for you to own the stock. In addition to this the pharmaceuticals industry recently won the long-fought battle that ended up with FDA allowing Pharmaceuticals companies to continue study on painkillers to enable them to try and test different alternatives.
My Recommendation on Abbott
I recommend buying Abbott now. Some people will advise you to short the stock, while others will opt against any involvement with Abbott. However, a stock that boasts strong fundamentals like Abbott will do well going forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.