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ABT - A Solid, Slightly Underpriced Dividend Grower

|Includes: Abbott Laboratories (ABT)

Lately it seems that dividends, and large, low beta stocks seem to be all the rage. Naturally it has been difficult to find anything near a reasonable price in this area. ABT, however seems to be worth investigating. Nothing about it will blow your socks off, but it does provide a reasonable value at this point. A quick look at the company:

 

Business/Management

Unless you have been living under a rock you know that Abbot is a pharma giant. They they have their finger in pretty much every “pie” having to do with health, from drugs to lasik surgery. Interestingly, ABT's main source of revenue is from overseas (54%), with their main focus on Europe and emerging markets. It doesn't need a genius to figure out that an aging US population and increased wealth (and thus ability to pay for healthcare) in emerging markets will help ABT grow.

As long as the management doesn't mess anything up, and they have been fairly good about not doing this in the past, as the company has been growing steadily over the last decade, ABT should be set for decent growth in the future. Although it is difficult to pin a perfectly accurate long term growth figure on the company one would likely be close in assuming that they will continue their 7-10% growth that they have shown over the past decade.

 

Metrics

Some important numbers (all TTM except yield and where noted):

P/E: 16

ROE: 22%

Yield: 3.7%

10 year CAGR EPS Growth: 7.6%

10 year CAGR Dividend Growth 8.8%

 

The Dividend

The yield itself is not exactly awe inspiring, one could collect a good deal more picking up shares of Southern Company or most bonds. But one is buying Abbott for the dividend growth, rather than the current yield. Over the next decade, if they can maintain their dividend growth of the past decade, the happy owner will receive a 5.8% annualized return, if they reinvest the dividends, based off the dividend alone. This isn't the sort of income that will blow your socks off, but it is passable.

As for maintaining the dividend, Abbott would have to fall on exceptionally hard times to not be able to keep up, and grow its payout. Their payout ratio is currently at 55%, a solid figure for a company with a stable business and increasing income, however when you look at cash flow you get an even better picture. The company hauls in some $5.3 per share in operating cash, which puts is payout as a percentage of operating cash flow at about 33%. That is quite impressive for a company whose business is stable. Even if earnings were stagnant over the next decade, it is quite likely that they could nearly double the dividend without incurring any worries as to payment problems.

 

Valuation

Like most of the healthcare sector the company has been stagnant over the last decade or so. This is likely due to the industry catching it's collective breath, if you will, as it about quintupled in share price over the prior decade. As healthcare is not what one would call an incredibly fast growing industry the companies have been slowly growing into their shoes, so to speak, and now are nearly ready to start walking. ABT probably earlier than most others in the industry.

I am not one to attempt to put a price tag on companies, I have found that I am not much for guessing exactly what their true worth is, but I do try to give valuation gradients, which I am pretty good at. I would say that given the solid business, past growth, and reasonable expectations for growth into the future the stock is somewhat ($3-10) undervalued, with some decent long term upside.

 

Stock Growth

Eventually the solid growth of the company will show up in the stock price. The stock likely won't go up quite as quickly as the earnings do, after all a larger company is bound to grow more slowly and as such deserves a higher yield, and lower P/E ratio, but I would not be surprised to see a situation somewhat like PG where about ¾ of the growth in the company translates into stock price growth. That would put future growth at about 5% a year. As I am sure you are well aware by now, nothing, including this, ought to blow you away about the company.

 

Overall

ABT is the definition of a boring stock. They make useful products that aren't very flashy and generate slow, fairly consistent, growth. Neither the dividend nor the growth of the company will make you rich overnight, but when you look at the growth in conjunction with the dividend there is a reasonable chance that someone buying the stock now can get a safe, solid 10% return, annualized on their investment. This is enough to satisfy me, and enough to convince me to use it as a safe, slow moving anchor in my portfolio.

Disclosure
Long ABT