Abbott: Too Overvalued to Make a Good Dividend Investment?

This article originally appeared on The DIV-Net July 14, 2008.

Linked here is a PDF copy of my analysis of Abbott Laboratories (ABT) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

ABT is trading at a discount to only 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, ABT is trading at an astounding 61.6% premium. A Star is deducted since ABT is trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

ABT earned two Stars in this section for 3.) and 4.) above. It has paid a cash dividend to shareholders every year since 1903 and has increased its quarterly cash dividend payments for 36 consecutive years. The 1-Yr. > 5-Yr Growth metric indicates that dividend growth has been accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA.

ABT was deducted one Star in this section for 1.) above. At its current yield of 2.51% and a dividend growth rate of 7.1%, ABT will under-perform a MMA averaging 4.61% by $957 per $1,000 invested over 20 years.

Other: ABT is a member of the S&P 500, is an Achiever and an Aristocrat. Like all drug companies, ABT is facing challenges to their branded patents, drug development and regulatory issues. However, ABT has a relatively strong new product pipeline, with possible significant launches in both the medical device and pharmaceutical areas.

Conclusion: ABT lost a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and lost one Stars in the Dividend Income vs. MMA section for a net total of 0 Stars. This quantitatively rates ABT as a 0 Star-Avoid stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $40.55 for the NPV of MMA Differential to reach the $2,500 minimally acceptable level for from a company that is both an Achiever and an Aristocrat. In short, ABT is overvalued and not a good dividend investment at this time. Thus, I won't be buying ABT any time soon.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Disclosure: At the time of this writing, I do not own shares of ABT (0.0% of my Income Portfolio).

Comments

[DividendGrowthInvestor]

D4L,

I also concluded that ABT is a little overvalued in my analysis previously:

seekingalpha.com/artic...

I believe that ABT is a long on dips below $46.