Why Abbott Labs Is Only Good For Dividends

| About: Abbott Laboratories (ABT)

Abbott Laboratories (NYSE:ABT) had a strong year in 2011. The company made advancements in its pipeline, launched new products, increased its earnings, dividends, and announced splitting up into 2 companies by the end of 2012. In the last year, the company's revenues increased by 10.50% and in the last 3 years, the revenue increase was 31.86%. The company's EPS grew at a faster rate of 11.8% in the last year.

Splitting Up

By the end of 2012, the company will split into two companies in order to become more functional and more profitable. One of these companies will keep the Abbott name and it will focus on a large variety of medical products. The company's current CEO, Miles White will lead this company. The second company is yet to be named, however its structure and leaders are already picked. This second company will focus on heavy research and produce pharmaceutical products. Richard Gonzalez, who has been with Abbott for 30 years, will lead this company.

Mr. Gonzalez has been leading the company's global pharmaceuticals business sector for a couple years after serving as the company's president and CEO. The reason of the split up is due to the two business segments of the company starting to have different pipelines, investment priorities, and operating models as a part of the evolution company has been going through. The split will allow each company to focus better on their own priorities and any issues that may arise. This should benefit the stockholders greatly as they will be able to examine value of each company and elect to invest in one, both or neither.

Growth Opportunities

There are two options in front of the company. First, it can find a few really successful products and become a huge expert in those products by focusing on them. Second, the company can diversify its portfolio of products as much as it can in order to have a stable income. It looks like Abbott's pharmaceutical business will take the first route and the medical devices business will take the second route. Both of the company's business segments saw a global revenue growth of 10% in the last year, and this trend is expected to continue moving forward.

In the medical devices business segment, emerging markets account for 40% of all the revenues. In the following years, this percentage is expected to rise near or above 50% as the company invests more into these markets. As the world population becomes more health conscious, the company will see strong growth in sale of its nutritional products which also include baby formulas. The company's baby brand formula Similac, pediatric nutrition brand PediaSure and milk-for-babies brand Gain have the top market share in US and strong demand overseas. These products will continue to drive the company's growth in the near future.

Abbott's diagnostic products also face a lot of strong demand as they help doctors all around the world to make decisions regarding their patients. The company's huge diversity of products are able to help diagnose a large number of conditions including cancer, diabetes, heart disease and a range of infections.

The company provides more than 500 pharmaceutical products all over the world. Many of these products are well-established. While some of these products are generic drugs, many are unique to the company. Currently, most of the growth regarding these products comes from emerging markets. In developed nations, most of the growth will probably come from launching new products. The company plans to launch more than 1,000 products around the world in the next 5-10 years, which will effectively triple the company's portfolio.

If we look at the company's pipeline of products, we see a lot of activity. Absorb gained approval in Europe and is seeking approvals in US, Japan, India and Brazil. This is a very promising product that acts as a vascular scaffold and dissolves itself after the job is done. The company is also working on developing targeted treatments that will limit or stop growth of tumors in the body. Abbott is in the third phase of testing effectiveness of Daclizumab, a drug for treating multiple sclerosis. The company is also in the same stage of testing for an intestinal gel used to treat advanced levels of Parkinson's Disease.


The company returned $3 billion to its shareholders in shape of dividends in 2011. This represents one third of the company's operating cash flow in the year, corresponding to a payout ratio of 33%. At this rate, the company's dividend rate is pretty safe. Abbott has been raising its dividend rate for 39 straight years and this tradition is likely to continue for years to come. Currently Abbott's dividend yield is 3.38%.

Share Price Movements

Currently Abbott's share price is $60.40, which is all-time high for the company. Previously, the company reached similar share price in late 1990s, early 2000s, and 2008. Historically, every time Abbott's share price neared or passed $60, it did not go further up. So the company's current share price might scare some investors off, however, in a bull market, it shouldn't be much of a worry. I believe that Abbott can trade for well above $60 if the bull market continues on. In the last decade, the highest P/E ratio for the company was 55.25 whereas the lowest was 13.44. Currently the company's P/E ratio is 20.

Analyst Ratings

Of the 21 analyst covering the stock, 7 rate it as "strong buy" 4 rate it as "buy" and 10 rate it as "hold." The average target price on the stock is $60 which is its current price. In 2012, the company is expected to grow its earnings by 7%.


Abbott is a decent company with growth opportunities. Given the stock's current share price, its price history, P/E ratio and dividend rate, I would only recommend it to dividend/income investors at the moment. The stock is too stable for growth investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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