Friday, February 17, 2012

Abbott Laboratories (ABT): An attractively valued dividend aristocrat

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. The company is a dividend aristocrat which has increased distributions for 39 years in a row. The most recent dividend increase was in February 2011, when the Board of Directors approved a 9.10% increase in the quarterly dividend to 48 cents/share. Abbott’s largest competitors include Johnson & Johnson (JNJ), Bristol-Myers Squibb (BMY) and Sanofi (SNY).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.50% to its loyal shareholders.


The company has managed to deliver an average increase in EPS of 12.90% per year since 2001. Analysts expect Abbott Laboratories to earn $4.65 per share in 2011 and $5.03 per share in 2012. This would be a nice increase from the $2.96/share the company earned in 2010.


The growth would come from increase in sales in rheumatoid arthritis and psoriatic arthritis drug Humira and the Xience drug eluting stent. The company’s growth is also dependent on the successful integration of the pharmaceuticals unit that it purchased from Solvay for $6.2 billion in 2010, which included Abbott with the cholesterol drugs Tricor and Trilipix. New launches, and

overseas market expansion should add in to Abbott's bottom line as well. Threats include generic competition to some of its cholesterol drugs. Abbott announced its intent to split in two companies in October 2011.

The first one will be a research-based pharmaceuticals company, which will own Abbott’s premier drug names such as Humira, Lupron, Synagis to name a few. It would be basically a drug company, which focuses on keeping its pipeline of new drugs coming to the market, through constant investment in research and development. Drug companies have faced steep patent cliffs over the past several years, which has intensified mergers in the sector. The second company will be a diversified medical products company, and its name would remain Abbott. It would own established nutritional products, medical devices and diagnostics products as well as generic drugs outside of the US.

The company has a high return on equity, which has remained above 20%, with the exception of a brief decrease in 2001 and 2006. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


The annual dividend payment has increased by 8.60% per year since 2001. A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1986, we see that Abbott Laboratories has actually managed to double its dividend every six years on average.


Over the past decade the dividend payout ratio has largely remained above 50%. This indicator has been closer to 50% over the past few years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


Currently, Abbott Laboratories is attractively valued at 18.30 times earnings, yields 3.50% and has a sustainable dividend payout. In comparison Johnson & Johnson (JNJ) yields 3.50% and trades at a P/E of 14.50. I would continue monitoring Abbott Labs and will consider adding to a position in the stock on dips.

Full Disclosure: Long ABT and JNJ

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4 comments:

  1. Hello There;

    I have been following the blog for awhile and agree with your approach to find solid payers and buy at reasonable prices.

    Have you sold your JnJ? Your posting on Feb 4/11 listed this as an ownership, yet this one shows no such ownership.

    Thanks,

    David T.

    ReplyDelete
  2. Just wondering if you are considering circling back to the topic of discount DRiPs. I am interested in them, but I have no idea where to go for a good list.

    ReplyDelete
  3. Thanks for the update - I was scratching my head and scouring the internet for anything that would have cause one to sell JNJ.

    David T.

    ReplyDelete
  4. Hello, I've been looking and looking, but I cannot find good information on how to record the ABT in my spreadsheet in order to get correct rates of return for both the ABT and ABBV, have you dealt with this, and if so how? Thanks for the help!

    ReplyDelete

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