Edited by Kate Boehme
Established in 1888, the Illinois-headquartered Abbott Pharmaceuticals (ABT) is a renowned pharmaceutical company, operating globally for the research, development and advancement of healthcare remedies. This company is continually expanding its existing services into more than 130 countries, including emerging economies in Asia.
Abbott Pharmaceuticals has a proven record of operating successfully over long periods. The company pays regular cash dividends, assuring investors a reliable source of income. In spite of the worldwide economic volatility, Abbott continues to present positive financial statements. It maintains a steady revenue stream thanks to its diversified product portfolio.
Financial Market Values
Abbott is a public limited company registered under the New York Stock Exchange and the Chicago Stock Exchange. Outside of the United States, this company is also listed with the London Stock Exchange and the Swiss Stock Exchange.
During the past year, Abbott stock has varied between $46.29 at its lowest, and $66.4 at its highest, which was achieved in the last week. Judging by these results, as well as data from the prior few years, it is clear that Abbott's share price is continuing to boom.
In comparison to the general market, Abbott has a Beta coefficient of 0.31, which is fairly below the market average. Its financial indicators also look stable. In the last 10 years, the company's dividend payout ratio ranged from 40% to 60%. There has been only one year, when the payout ratio exceeded 100%. Abbott's earnings-per-share has increased from $2.50 in 2007 to $4.66 in 2011. Abbott Laboratories have thereby become well-established in the market, having been awarded a top 10 ranking amongst world pharmaceutical companies.
Abbott's closest competitors can be listed as GlaxoSmithKline (GSK) and Novartis (NVS), both of which also operate on a global scale for similar product lines. In terms of trailing P/E ratio, Abbott looks relatively expensive compared to its peers. However, the forward P/E ratios are more or less in line with each other's forward P/E ratios. Abbott supports the highest growth expectations, and thereby has the lowest PEG among these three.
Financial Statements & Ratio Analyses
From the current public financial report, it can be observed that Abbott practices an exceptionally sound debt disclosure policy. This is clear in the levels of both short and long-term debt, which increased significantly between 2007 and 2010, but has actually been reduced in more recent years. Abbott's capital structure is more proportionate to its financial risk, the debt levels seem to be recovering further between 2011 and 2012.
Among Abbott's different accounting policies, "Sales Rebate" appears to be most the significant component. Approximately 54 percent of Abbott's consolidated gross revenues are subject to some sort of various rebates and allowances. Since 2009, the rebate levels against the relative gross yearly sales have increased steadily, with values of $4.4 billion in 2009, $4.9 billion in 2010, and $5.5 billion in 2011. This strategy has brought the company's sales to a sustainable level, even during the worldwide financial crises. Abbott's success is particularly apparent, given the continuous growth of its gross income from 2007 through 2011.
Modigliani-Miller theorem (M-M Theory), which is often known as the capital structure irrelevance principle, is crucial to the development of financial theory. In essence, M-M Theory assesses how certain market price processes might have reduced or eliminated items such as bankruptcy costs, agency costs, taxes or asymmetric information. This theory is particularly relevant in assessments of the marketplace, where its efficiency can ensure that the value of a firm remains unaffected by the company's capital structure. One needs to look at the recent financial data, ratios and comparisons to industry standards to develop a picture of a stock according to M-M Theory.
Our analysis suggests that Abbott presents the highest returns with regards to rational sustainability and fluctuation. Despite the relatively high leverage, Abbott is still clearly a sound investment. The debt can be compensated through the presentation of a stable portfolio of invested capital. This balance has sustained the company's operational growth regardless of any economic turbulence or fluctuations in the financial marketplace.
Given the bullish market sentiment behind Abbott stock, it is apparent that Abbott's stock price fluctuates slightly; it does not change substantially, even though Abbott has good deal of debt, as well as large tax obligations. While many professionals believes the M-M Theorem is hard to implement accurately, this is clearly not the case, as evidenced by Abbott's financial estimation, positioning, and capital structure. Abbott's market price is largely independent of internal capital financing and debt or equity positioning issues.
Based on Abbott's long-term performance in the market, it is certain that the theorem of Modigliani-Miller is perfectly suited to analyzing Abbott's business pattern. Applying the principles of M-M theory suggests Abbott as a reliable stock that is suitable for long-term investment.
With a high rate of investment, Abbott could cover any kinds of financial obligations that might arise from either nominal financial stress or emergency situations within the company. Abbott's share potential could therefore be considered as low risk level. Current performance ought to sustain the risk level at medium, and prevent any serious downslides. While the current price looks relatively expensive, the M-M theory suggests Abbott as a good buy. However, it should be noted that volatile global conditions, in which currency, commodity and financial markets are unpredictable, the application of such theoretical models are less helpful for predicting stock values.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.