Updated on January 30, 2023 by Nikolaos Sismanis
Abbott Laboratories (ABT) is a well-known dividend growth stock, and for good reason. The company is an exclusive member of Dividend Aristocrats, an elite dividend stock group with more than 25 years of consecutive dividend increases.
We believe that Dividend Aristocrats are among the best dividend stocks to buy and hold for the long term.
With this in mind, we created a complete list of the 68 Dividend Aristocrats. You can download the full list, along with important financial metrics such as dividend yield and price-earnings ratio, by clicking the link below:
Abbott is diversified into multiple areas of healthcare, each of which has positive long-term growth potential. This has fueled Abbott’s impressive history and will continue to do so for years to come. This article will discuss the investment prospects of Abbott Laboratories in detail.
Abbott Laboratories is a diversified healthcare corporation with a market capitalization of $192.2 billion. The company was founded in 1888 and is headquartered in Lake Bluff, Illinois.
The company operates in four main segments: Nutritional Products, Established Pharmaceuticals, Diagnostics, and Medical Devices. Abbott enjoys a leadership position in all product segments.
Font: Investor Fact Sheet
The company’s Nutrition Products segment is the #1 provider of pediatric nutrition in the United States and select other geographies. Additionally, segment performance has improved considerably in recent years as operating margin has improved every year since 2011.
The latest segment of Abbott Laboratories is the medical device unit. This segment has seen a strong boost in recent times due to the Acquisition of St. Jude Medical, which has helped grow sales at a single-digit rate since it was fully integrated into the company. The company’s portfolio of high-quality products and the acquisition of St. Jude should fuel strong growth over the next few years.
Over time, Abbott Laboratories has demonstrated the ability to reliably increase its adjusted earnings per share. Abbott Laboratories spun off AbbVie (ABBV) in 2013, and both businesses have performed well since the spin-off. If an investor had held onto their shares in both companies, their combined earnings per share would be approximately $19.12 in 2022. This is significantly higher than the $4.99 (13.6% annual growth) of adjusted earnings per share reported by the company combined in 2012.
Looking ahead, Abbott Laboratories has two major growth prospects that will help make its business increasingly profitable in the years to come.
The first is the aging of the population, both nationally and within the United States. In 2019, the percentage of the world population that was over 65 years old was 9.1%. This proportion is expected to reach 16% by 2050.
The second big tailwind that will benefit Abbott Laboratories is the company’s focus on emerging markets. This is particularly true for its branded generic pharmaceuticals segment.
Many of the countries this segment is focused on are spending a very small proportion of their total GDP on healthcare, a rate that is expected to increase in the future.
The aging of the national population combined with the low focus on healthcare spending in emerging market countries should leave Abbott Laboratories plenty of room to grow for the foreseeable future.
Competitive advantages and performance in recession
Abbott Laboratories’ competitive advantage is twofold. The first component is its remarkable brand recognition among its consumer medical products, particularly in its Nutrition segment. Led by notable products such as the Aseguro meal replacement supplement, Abbott Laboratories brands enable its sales to remain strong even in the worst economic downturns.
The second component of Abbott’s competitive advantage is its focus on research and development. The company’s R&D spending over the last five years is shown below:
- Research and development spending in 2018: $2.3 billion
- Research and development spending in 2019: $2.4 billion
- Research and development spending in 2020: $2.4 billion
- Research and development spending in 2021: $2.7 billion
- Research and development spending in 2022: $2.9 billion
Abbott Laboratories’ investment in research and development demonstrates that the company is willing to play the long game, developing its product portfolio and enhancing its prospects for long-term business growth.
As a large and diversified healthcare business, Abbott Laboratories is remarkably resilient to recession. In fact, the company managed to increase its adjusted earnings per share during each year of the 2007-2009 financial crisis.
- 2007 earnings per share of $2.84
- 2008 earnings per share of $3.03 (6.7% increase)
- 2009 earnings per share of $3.72 (22.8% increase)
- 2010 earnings per share of $4.17 (12.1% increase)
Remarkably, Abbott Laboratories managed to increase its earnings per share during the global financial crisis, one of the most difficult economic periods in history. At the same time, the number of shares in the company increased. This means that Abbott Laboratories did not use share repurchases to increase earnings per share, they were simply more profitable during tumultuous times. We expect this recession-resistant Dividend Aristocrat to perform similarly during future downturns in the business environment.
From a dividend perspective, the Abbott Laboratories dividend also looks very safe.
Valuation and Expected Total Returns
Abbott Laboratories reported the fourth quarter Profits on January 25, 2023. For the quarter, the company generated $10.1 billion in sales (58% outside the US), representing a 12.2% decrease compared to the fourth quarter of 2021. Earnings per adjusted share of $1.03 compared unfavorably to $1.32 in the prior year.
Revenue was $410 million better than expected, while adjusted earnings per share beat estimates by $0.10. For 2022, revenue grew 6.4% to $43.7 billion, while adjusted earnings per share were $5.34 compared to $5.21 a year earlier.
Font: Investor Fact Sheet
Abbott Laboratories is currently trading at ~$110 per share. Using the midpoint of the company’s guidance for the year gives the stock a price-earnings ratio of 25.0
Abbott Laboratories’ price-earnings ratio has generally been in the 20-25 range over the past five years. The current valuation is at the upper end of this range. Despite the company’s innovative product line and ability to grow during tough economic times, we believe a fair price-to-earnings ratio of 20 is more appropriate in today’s environment. If the stock returns to our fair value estimate of 20 by 2028, then the valuation would be a 4.4% hurdle to annual returns over this time period.
While now may not be the best time to buy Abbott shares, investors should look to any significant drop in the share price as a buying opportunity, given the high-quality nature of the business model.
The other major component of future total returns for Abbott Laboratories will be growth in the company’s earnings per share. As we’ve seen, the company has a proven ability to grow profits in high single digits every year. We expect this growth to continue, and investors can reasonably expect adjusted annual growth in earnings per share of 5% going forward.
Lastly, Abbott’s total returns will get a boost from the company’s dividend payments. After raising its dividend by 8.5% last December, Abbott Laboratories is now on a 51-year dividend growth streak, retaining its Dividend King status. The company pays a quarterly dividend of $0.51 that yields 1.9% using the current stock price.
In general, Abbott Laboratories expected total returns will be composed of:
- 5.0% growth in earnings per share
- 1.9% dividend yield
- 4.4% multiple reversal
Total expected annual returns are forecast to be just 2.6% through 2028. This is a fairly low expected rate of return due to the overvaluation of stocks at the moment.
Abbott Laboratories has many of the characteristics of an attractive dividend investment. It has a recession-resistant business model that allows it to continue to grow earnings per share through various economic environments. It also has a long history of steadily increasing dividend payments.
That said, we believe that the stock’s current valuation prevents it from offering significant return prospects in the coming years, which is why we rate Abbott Laboratories a sell. We suggest investors consider this high-quality stock on any notable dip.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be helpful:
The major national stock indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:
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