Dividend Aristocrats Part 30: Abbott Laboratories (ABT)

Abbott Laboratories (NYSE:ABT) was founded in 1888 and has grown to reach a market cap of more than $67 billion.

Abbott Laboratories has been wildly successful in its long history.  The company’s success is not a historical relic; Abbott has positioned itself well to take advantage of growth in the emerging market health care sector.

Many corporations talk about being global. Abbott Laboratories really is global.  The company generates 69% of its sales internationally – and around 50% of sales come from emerging markets.

Abbott Laboratories became a lot more palatable to the investors tracked by Insider Monkey after its shares fell by about 18% in the third quarter. 55 of those investors were long Abbott by the end of the quarter, up from 49 at the start of it. And despite the aforementioned decline in shares, the value of those investors’ collective positions actually rose by 11% during that time, to $2.08 billion. Ric Dillon’s Diamond Hill Capital held an 8.39 million-share position in Abbott Laboratories on September 30, while Dmitry Balyasny’s Balyasny Asset Management added a 2.35 million-share position in Abbott to its portfolio during the third quarter.

Over the long run, this will serve the company well – especially its large exposure to emerging markets.  The company takes a unique country-centered approach to growth:

“By designing and manufacturing our products in the markets we serve, we can better match them to local preferences, and produce them more efficiently. And by keeping our costs local, we reduce our exposure to foreign currency fluctuation. 

This approach also lets us build our presence and strengthen our relationships with key stakeholders in every country in which we do business.”

Source:  Abbott 2015 Annual Shareholder Meeting, page 1

In part 30 of Sure Dividend’s 52 part Dividend Aristocrats series, we will take a closer look at the growth prospects, valuation, and total return potential of Abbott Laboratories.

Business Overview

The company operates in 4 segments. Each segment is shown below along with the percentage of total revenue generated for Abbott Laboratories during the first 9 months of fiscal 2015:

 – Nutrition generated 34% of total revenue

 – Medical Devices generated 25% of total revenue

 – Diagnostics generated 23% of total revenue

 – Established Pharmaceuticals generated 19% of total revenue

The Nutrition segment manufactures and markets Ensure, Pedialyte, Similac,Zone Perfect, Elecare, and other health oriented nutrition products for every stage of human life from being an infant to old age.

The Medical Devices segment manufactures and sells optical, vascular, and diabetes care devices and equipment to health care providers.

The Diagnostics segment manufactures and sells various instruments, tests, and diagnostic equipment to blood banks, laboratories, and other health care facilities throughout the world.

The Established Pharmaceutical segment sells generic pharmaceuticals outside the United States.  The segment operates primarily in emerging markets.

Abbott Laboratories Dividend History

Abbott Laboratories (NYSE:ABT) has paid a dividend every year since 1924.  The company has increased its dividend payments for 43 consecutive years (excluding the effects of spin-offs).  The company’s stock currently has a dividend yield of 2.1%.

Abbott Laboratories has a payout ratio of 43% (using adjusted earnings).  The company’s reasonable payout ratio gives management plenty of room to increase dividend payments, even if earnings were to be flat for a year.

Going forward, I expect Abbott Laboratories to grow its dividend payments by around 10% a year, in line with expected earnings-per-share growth.  Growth prospects are discussed in detail later on in this article.

If the company can grow earnings-per-share at 10% a year, it will have the following yields on cost in the future:

 – Yield on cost in 3 years of 2.8%

 – Yield on cost in 5 years of 3.4%

 – Yield on cost in 10 years of 5.4%

Based on a 2.1% dividend yield and a 10% growth rate, Abbott Laboratories has a dividend payback period of 19 years.

It is very likely that Abbott Laboratories will continue paying increasing dividends in the future based on its conservative payout ratio and commitment to dividend increases.

Abbott Laboratories’ Competitive Advantage

Abbott Laboratories is a diversified health care business with multiple competitive advantages that support its different segments.

The company’s strong brand portfolio in its Nutrition segment has given it the leading worldwide market share in adult nutrition and the top market share in US pediatric nutrition.

Abbott Laboratories long history and global reach give it a unique competitive advantage that new entrants to the market cannot replicate.  Abbott Laboratories has been building contacts, distribution, and expertise in health care for over 125 years.  The company’s operational know-how is supplemented by its intellectual property portfolio, strong brands, and global reach and scale.

The company has had success in emerging markets because it emphasizes manufacturing in the country where goods are sold. This reduces currency fluctuation risks and builds connections with the communities, companies, and governments the company serves.

Recession Performance

Abbott Laboratories managed to grow revenue, earnings, and dividends each year through the Great Recession of 2007 to 2009.

The company’s excellent performance through such a difficult period makes the company the 3^rd most recession proof Dividend Aristocrat.  Click here to see the most recession proof Dividend Aristocrats.

Consumers and governments typically do not cut back on health care expenditures regardless of the economic climate. That’s how Abbott Laboratories is able to perform so well during bear markets.  Abbott Laboratories stock fell just 4.95% in 2008 while the S&P 500 declined 38%.

The company’s earnings-per-share from 2007 through 2009 are shown below to give an idea of how well the company performs during recessions:

 – 2007 earnings-per-share of $2.84

 – 2008 earnings-per-share of $3.03

 – 2009 earnings-per-share of $3.72

Future Growth Potential

Abbott Laboratories (NYSE:ABT) has invested heavily in emerging markets. These investments are paying off by providing strong double-digit growth for the company. Emerging market sales grew 21.2% on a constant-currency basis in Abbott Laboratories’ most recent quarter.

The company currently generates around 50% of sales in emerging markets.  The company’s future growth is dependent on rising GDP in emerging markets.  As consumers in these markets see increases in their income, the will continue to demand better health care products.  Abbott Laboratories is situated to provide these health care products to consumers in emerging markets.

Abbott Laboratories’ emerging market penetration gives it excellent long-term growth prospects. The combination of emerging market economic growth and aging populations provide a favorable macroeconomic environment for Abbott Laboratories.

The combination of lower global birth rates and longer life expectancies is creating an aging global population.  This is not good for generational wealth transfer systems like social security, but it is very good for health care companies.  It’s no secret that the elderly spend more on health care than younger people.  The more elderly there are, the better business environment for Abbott Laboratories.

The image below from the United Nation’s World Aging Report shows the massive growth in the 60+ global population through time.

Abbott Laboratories should continue to grow quickly over the next several years. If a global recession were to occur, management has plenty of ‘dry powder’ in the form of over $6 billion in cash and short-term investments sitting on its balance sheet.  The company could use this cash to pursue further acquisitions in international markets if a recession were to occur.

Value Line projects earnings-per-share growth of around 10% a year over the next several years for Abbott Laboratories.

The company generated constant-currency revenue growth of 10.9% in its most recent quarter versus the same quarter a year ago.  Earnings-per-share grew by 13.4% in fiscal 2014 for the company.

I believe 10% is a conservative estimate of the company’s earnings-per-share growth going forward.

Expected Total Returns

Abbott Laboratories has an expected earnings-per-share growth rate of 10% a year over the next several years.

In addition, the company currently has a 2.1% dividend yield.

Investors in Abbott Laboratories should expect total returns of around 12% a year going forward from dividends and earnings-per-share growth.

An investment that grows at 12% a year doubles in value every about every 6 years.  Not bad for a well-established health care business with fairly low risks thanks to its strong competitive advantage.

Is Abbott Laboratories Over-Valued?

Abbott Laboratories is currently trading for an adjusted price-to-earnings ratio of 20.3.

This number uses adjusted earnings, not GAAP earnings. The company’s adjusted earnings do not include amortization expense and other items. The adjusted earnings give a more accurate picture of Abbott Laboratories’ true earnings power.

With a price-to-earnings ratio of 20.3, Abbott Laboratories is not a value play.  The company does possess a strong and durable competitive advantage and double-digit expected total returns.

Abbott Laboratories’ price-to-earnings ratio is around 10% below the S&P 500’s price-to-earnings ratio of 22.0, despite Abbott having a greater expected growth rate and a comparable dividend yield.

I believe Abbott Laboratories to be trading around fair value at current prices.  The company’s historical price-to-earnings ratio is a poor guide to use as Abbott’s spin-off of AbbVie Inc (ABBV) at the end of fiscal 2012 significantly altered the company.

Final Thoughts

Abbott Laboratories’ stock has only risen 4.8% in the last year due to a strong United States dollar.  The strong dollar hurts the company’s reported results as it must translate its earnings back to dollars.

Despite this short-term headwind, Abbott Laboratories has favorable long-term growth prospects.

Additionally, the company is likely trading around fair value.

Abbott Laboratories is among the highest quality dividend growth stocks in the health care industry. The health care industry itself is among the best industries to invest; people will always need health care. Long-term thinking dividend growth investors would do well to make Abbott a core holding of their portfolio.

Abbott Laboratories currently ranks in the Top 20 based on The 8 Rules of Dividend Investing.  The company’s solid expected growth rate, decent dividend yield, fairly low payout ratio, and low price standard deviation of just 19.8% should appeal to investors seeking above average total return with lower than average risk.

Disclosure: None