Abbott Labs: Dividend Analysis

Abbott Laboratories (ABT) engages in the development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products.

Abbott Laboratories is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 36 consecutive years. Over the past 10 years the company has delivered an average total return of 8.50% annually to its loyal shareholders.

 

 

 

 

 

 

 

 

The company has managed to deliver a 4.80% average annual increase in its EPS.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The ROE has been declining over the past 10 years, from its highs in 1998 of over 40% to its lows of 12% in 2006. A declining ROE trend is a ref flag for me. I would like to see some stabilization in this ratio over the next few years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual dividend payments have increased over the past 10 years by an average of 6.80% annually, which is slightly above the growth in EPS. A 6.80 % growth in dividends translates into the dividend payment doubling almost every 10 years. If we look at historical data, going as far back as 1985, ABT has indeed managed to double its dividend payments every five and a half years.

 

 

 

If we invested $100,000 in ABT on December 31, 1997 we would have bought 3053 shares (adjusted for a 2:1 split in June 1998). Your first quarterly check would have been $412.15 in early 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly payment would have risen to $1210.62 by October 2007. For a period of 10 years, your quarterly dividend has increased by 140.75 %. If you reinvested it though, your quarterly dividend would have increased by 193.75%.

 

 

 

 

 

 

 

The dividend payout ratio has remained above 50% for the majority of the time over the past 10 years however. Overall, a lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

 

 

 

 

 

Overall, I think that ABT is overvalued at its P/E of over 22 and DPR of over 50%. The only positive is the higher than average dividend yield of 2.60%. I would only consider initiating a long position below $46, as long as the payout is closer to 50% and the dividend yield exceeds the yield on the SPY.

Full Disclosure: I do not own shares in ABT

Comments

[SivBum]

$54.xx this morning, a long way from $46...

[DividendGrowthInvestor]

SivBum,

There is indeed a long way to go before it reaches $46. What you could do is sell naked puts at $45 strike. If you wanted to purchase 100 shares of ABT, sell one contract for example. Picking the expiration month could be tricky, however. That way you are basically paid for you "limit" order.

[Comment2]

Abbott also has a diabetes division as well - it would be more precise to say - it's medical device division - rather than just vascular. Do your homework before you publish it!

[DividendGrowthInvestor]

Comment2,

I have already done my homework - the above short description of the company is the same as the first several lines on Yahoo Finance. Please do not criticize without doing the homework yourself :-)

Below you could find the whole description of the "Vascular Division" :

The Vascular Products segment provides a line of coronary, endovascular, and vessel closure devices for the treatment of vascular diseases. It also offers blood glucose monitoring meters, test strips, data management software, and accessories for people with diabetes. Abbott has a 50% owned joint venture with TAP Pharmaceutical Products, Inc.; a strategic alliance with Celera Group; and a collaboration with Genentech, Inc. to develop anti-cancer compounds. The company was founded in 1888 and is based in Abbott Park, Illinois.