Published on October 12th, 2022 by Josh Arnold
Abbott Laboratories (ABT) recently increased its dividend for the 50th consecutive year. As a result, it has joined the list of Dividend Kings.
The Dividend Kings are a group of just 45 stocks that have increased their dividends for at least 50 years in a row. Given this longevity, we believe the Dividend Kings are among the highest-quality dividend growth stocks to buy and hold for the long term.
With this in mind, we created a full list of all 45 Dividend Kings. You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:
Abbott is a diversified healthcare giant, and we believe it has a long runway of growth up ahead.
While the stock appears slightly overvalued, it can continue to be relied upon for annual dividend increases.
This article will discuss the company’s business overview, growth prospects, competitive advantages, and expected returns.
Business Overview
Abbott Laboratories is a healthcare stock with a market capitalization of $177 billion. The company was founded in 1888 and is headquartered in Lake Bluff, Illinois.
Abbott operates in four main segments: Nutritional Products, Established Pharmaceuticals, Diagnostics, and Medical Devices, and enjoys a leadership position across product segments.
Abbott reported second quarter earnings on July 20th, 2022, and results showed strong growth year-over-year.
Source: Earnings Infographic
Total sales were $11.3 billion, which was up 11% year-over-year. Adjusted earnings-per-share of $1.43 represented better than 22% growth from last year’s Q2. US sales were 37% higher, while International sales declined 4%. Each operating segment saw higher revenue with the exception of Nutrition, which faced a headwind from baby formula recalls in the US.
Source: Earnings Infographic
We expect the Nutrition business to return to growth given its baby formula issues have been resolved, and production is back at full capacity. It’s the third-largest segment for Abbott, but critical if the company is going to post sustainable revenue growth.
Guidance was raised to at least $4.90 in earnings-per-share for this year, and that’s where we’ve set our estimate.
The company’s high-quality product portfolio should fuel strong growth for the next several years.
Growth Prospects
Looking ahead, Abbott Laboratories has two major growth prospects for the years to come.
The first is the aging population, both within the United States and internationally. In 2019, the percent of the global population that exceeded age 65 was 9.1%. This proportion is expected to reach 16.7% in 2050. As people age, they tend to need more medical treatments, including many of the therapies that Abbott produces.
The second broad tailwind that will benefit Abbott Laboratories is the company’s focus on emerging markets. This is particularly true for its Branded Generic Pharmaceuticals segment.
Abbott has a strong position in growth markets such as diagnostics. It is the market leader in point–of–care diagnostics, and cardiovascular medical devices.
Lastly, earnings-per-share will be boosted by share repurchases, which is something Abbott spends billions of dollars on annually.
As a result, Abbott should be able to generate attractive long–term growth rates for both earnings–per–share and dividends. Overall, we expect 5% annual earnings-per-share growth for Abbott over the next five years.
Competitive Advantages & Recession Performance
Abbott Laboratories’ first competitive advantage is its brand recognition among its consumer medical products, particularly in its Nutrition segment.
Led by noteworthy products like the Ensure meal replacement supplement, Abbott Laboratories brands allows its sales to stand strong through even the worst economic recessions.
The second component of Abbott’s competitive advantage is its focus on research and development. The company’s R&D expense over the last five years is shown below:
- 2017 research & development expense: $2.2 billion
- 2018 research & development expense: $2.3 billion
- 2019 research & development expense: $2.4 billion
- 2020 research & development expense: $2.4 billion
- 2021 research & development expense: $2.7 billion
Abbott Laboratories’ investment in research & development shows that the company is willing to play the long game, building out its product pipeline and improving its long-term business growth prospects.
As a large, diversified healthcare business, Abbott Laboratories is extraordinarily recession-resistant. The company actually 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)
As you can see, Abbott actually grew its earnings-per-share in each year of the Great Recession.
We expect this recession-resistant Dividend King to perform similarly well during future downturns in the business environment.
From a dividend perspective, Abbott’s dividend also appears very safe. The company has a projected dividend payout ratio of 38% for 2022. Abbott has raised its dividend for 50 consecutive years, and has paid dividends to shareholders for nearly 100 consecutive years.
Valuation & Expected Total Returns
Based on expected EPS of $4.90 for 2022, Abbott stock trades for a price-to-earnings ratio of 20.8. The current valuation is noticeably higher than its long-term average.
Our fair value price-to-earnings ratio is 20, meaning the stock appears to be slightly overvalued. A declining P/E multiple could reduce annual returns by 0.7% over the next five years.
The other major component of Abbott Laboratories’ future total returns will be the company’s earnings-per-share growth. We expect 5% annual EPS growth for the company.
Lastly, Abbott’s total returns will receive a boost from the company’s dividend payments. Shares currently yield 1.8%.
Overall, Abbott Laboratories’ expected total returns could be composed of:
- 5% earnings-per-share growth
- 1.8% dividend yield
- -0.7% multiple reversion
Total expected annual returns are forecasted at 6.1% through 2027. Given how the valuation has declined, we now rate Abbott a hold.
Final Thoughts
Abbott Laboratories has a long history of growing its profits and dividends, thanks to its strong brand portfolio.
While the company’s current valuation fractionally exceeds its long-term average, Abbott Laboratories remains a hold.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
The major domestic stock market 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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