Step 4: Socially Responsible Investing

This is the fourth in a series of articles elaborating on the 9 Steps To Build and Manage a Dividend Portfolio.

One thing to ask yourself when you begin building a dividend portfolio is: What do I feel comfortable owning? Some people only feel comfortable owning dividend stocks that align with their own morality, while others are comfortable owning stocks that they don’t agree with. Whichever kind you are, it’s useful to know ahead of time and to invest accordingly.

Socially Responsible Investing

As a shareholder of a company, you’re a legitimate owner of the companies you invest in. You make profits based on what they do. But at the same time, unless you buy stock in an IPO (initial public offering), you’re not actually funding their activities. You do indirectly assist management by buying stock because you drive the stock price up ever so slightly which generally provides positive feedback for management and their compensation packages and success ratings. (It’s one of those things where you won’t make any noticeable difference, but everyone acting as a whole does.)

Companies dealing with tobacco, gambling, alcohol, big oil, and environmental issues are the ones most commonly avoided by investors that seek to align their portfolios with their ethical preferences. Other examples might be defense companies, or companies that have labor practices that some consider to be unfair, like Walmart with many of its employees on welfare programs, or Exxon which has voted down a proposition to add sexual orientation to the discrimination policy every year since its merger with Mobil, and has long-since undone Mobil’s decision to provide benefits rights to partners of gay employees.

Investors will all have different things that they find to be ethical or unethical. When it comes to the topic of socially responsible investing, I usually break down companies into two categories.

Fundamentally Opposed

Some companies may be fundamentally opposed to your ethics. This means that, the core of the company is dramatically opposed to what you stand for. Perhaps you have family members that died from lung cancer; it’s fathomable you might be fundamentally opposed to Phillip Morris. Maybe you’re a vegetarian, and McDonald’s won’t work for you. Or possibly you’re a staunch pacifist, so Lockheed Martin won’t work for you.

For a company that you are fundamentally opposed to, there’s no realistic possible change that would result in the company’s ethics being aligned with yours.

Partially Opposed

Some companies may have operations that you don’t necessarily disagree with, but you disagree with how they are going about it. For instance, maybe you respect Costco, but not Walmart, because Walmart is known for not treating employees as well as Costco. Or maybe you advocate LGBT rights, and strongly dislike ExxonMobil’s discrimination policy.

The argument to avoid investing in companies that you are partially opposed to is that if you invest in them, you’ll be benefiting from that which doesn’t meet your ethical positions.

The argument to invest in these sorts of companies is that, as a shareholder, you can vote to change their practices. Of course, you can’t do it alone, but if more people who thought like you invested and voted, change could occur. If those who dislike the company’s practices avoid the stock, the situation is unlikely to change.

Voting as a Shareholder

An advantage of owning individual stocks over index funds is that you get to vote your shares. With the proliferation of index funds, people have largely given up their voice while taking the cash and sustaining stock prices. What more could a board of directors ask for?

I promote shareholder advocacy, because I think it’s an essential part of healthy capitalism. People complain left and right about what corporations do, how much CEOs get paid, environmental damage, and so forth, but then they gladly remove themselves from the decision processes.

Conclusion

The takeaway from this article is that, regardless of whatever ethical considerations you take into account with your portfolio, if any at all, make sure you have a game plan. Make note of which business types, if any, are fundamentally or partially opposed to your ethical viewpoints, and forge a conclusion regarding how you are going to go about investing in these sorts of companies. And lastly, for companies that you do own stock in, you can exercise your right to vote in order to shift the company to what your best possible vision of it is. Healthy capitalism occurs when owners take an interest, and owners as an aggregate have a lot of power.

 Dividend Insights Newsletter

We respect your email privacy

Abbott Laboratories (ABT) Dividend Stock Analysis

Summary

Abbott Laboratories (ABT) is a premier pharmaceutical company and has been a great long-term investment over the years.

-Five year average annual revenue growth rate: 9.5%
-Five year average annual income growth rate: 6.5%
-Five year average annual dividend growth rate: 9%
-Current dividend yield: 3.74%
-Balance sheet strength: Fair

I find Abbott to be a solid value right now. The current P/E ratio is a bit high, and forward P/E is significantly lower and more of a value. Although reliant on the continued success of Humira, Abbott is otherwise highly diversified. In addition, the dividend yield is significant, and dividend growth is strong.

Overview

Founded in 1888, Abbott Laboratories (ABT) produces a large variety of pharmaceutical products and nutritional products. They produce everything from Vicodin to coronary stints to Ensure, and have 90,000 employees in 130 countries.

The company had $35.2 billion in sales for 2010. A bit over 42% of this came from the United States, and the remainder came from other countries. The Pharmaceutical Segment was responsible for 57% of total sales, Nutritionals accounted for 16% of total sales, Diagnostics accounted for 11%, Vascular accounted for 9% of total sales, and 7% came from other sources.

Revenue, Earnings, Cash Flow, and Metrics

Abbott has strong growth and consistent performance.

Revenue Growth

Year Revenue
2010 $35.2 billion
2009 $30.8 billion
2008 $29.5 billion
2007 $25.9 billion
2006 $22.5 billion
2005 $22.3 billion

Revenue growth has averaged 9.5% annually over this five year period.

Income Growth

Year Income
2010 $4.63 billion
2009 $5.75 billion
2008 $4.73 billion
2007 $3.61 billion
2006 $1.72 billion
2005 $3.37 billion

Abbott’s income has increased at an average annual rate of 6.5% over the past 5 years. This calculation was significantly affected by the reduced net income for 2010 compared to 2009.

In 2010, prepaid expenses and accounts payable contributed significantly to the fact that Abbott this year had particularly high cash flow and rather low net income. This is a matter of timing that should smooth out next year.

Cash Flow Growth

Year Operational Cash Flow Free Cash Flow
2010 $8.74 billion $7.72 billion
2009 $7.26 billion $6.19 billion
2008 $7.00 billion $5.71 billion
2007 $5.18 billion $3.53 billion
2006 $5.26 billion $3.92 billion
2005 $5.05 billion $3.84 billion

Annualized, Abbott has had average operational cash flow growth of 11.5%, and free cash flow growth of 15%, over the past five years.

Metrics

Price to Earnings: 17.3
Price to FCF: 10.2
Price to Book: 3.5
Net Profit Margin: 13.2%
Return on Equity: 20.6%

Dividend Growth

Abbot currently has a dividend yield of over 3.70%, which is historically and recently high for the stock. Abbott has increased dividends for the past 38 consecutive years.

Dividend Growth

Year Dividend Yield
2010 $1.72 3.50%
2009 $1.56 3.40%
2008 $1.41 2.60%
2007 $1.29 2.50%
2006 $1.18 2.60%
2005 $1.10 2.50%

Dividend growth has averaged over 9% annually for the past 5 years. For 2011, Abbott increased the quarterly dividend from $0.44 to $0.48, which represents a 9% increase.

The dividend payout ratio was under 60% in 2010, so their dividend is very-well covered by earnings and is positioned to continue growing. 2010 was a low year for EPS compared to 2009, so normally the payout ratio is lower.

Balance Sheet

LT Debt to Equity is about 0.56, which is decent. However, a significant part of Abbott’s growth comes from acquisitions, so the accumulated goodwill consists of 70% of shareholder equity, which is higher than I’d like to see. The interest coverage ratio is over 10, which is strong.

Overall, this means Abbott has a moderately strong balance sheet. They are neither too conservative nor overly-leveraged. Some other health care investments that I’ve considered on this site, Becton Dickinson (BDX) and Johnson and Johnson (JNJ), both have stronger balance sheets, but Abbott’s financial position is still reasonable. It is comparable to the financial position of Medtronic (MDT).

Investment Thesis

Abbott is consistent, has great historical performance, appears to have considerable growth potential going forward, and pays a good dividend that increases every year.

Abbott has continued its expansion into emerging markets in 2010, with acquisitions of Solvay Pharmaceuticals and Piramal Healthcare Solutions, and a collaboration with Zydus Cadilla. After the Piramal acquisition, Abbott claims the leading position for pharmaceuticals in India, and the company expects the Indian pharmaceutical market to double in the next five years. A bit under one-quarter of Abbott’s sales are from emerging markets, and in five years, Abbott expects this to shift up to one-third. Over the past ten years, Abbott has more than quadrupled its total international sales.

With the exception of Humira, which makes up a significant percentage of Abbott’s total sales, Abbott is quite diversified. The company has leading positions in the American pharmaceutical market, especially in the areas of autoimmune diseases, HIV, and lipid management. The company has hundreds of generic medicines across the world, over 100 brands of medical devices, and 50 worldwide nutrition brands. The company has many Phase II and Phase III compounds in its pipeline, and expects to have 20 new molecular entities in Phase II or Phase III development by the end of this year. For medical devices, the company has plans to launch several diagnostics products over the few years, and expects 20 new products and advancements from their vision care pipeline over the next five years.

Overall, I am in favor of investments in the health care industry currently. The life expectancy around the world varies significantly by geographic region. North America, Western Europe, Australia, and the highly developed East Asian countries lead the world with expectancies ranging from the mid-70s to the 80s. Behind them are South America, the Middle East, Eastern Europe, and some portions of Asia including China with life expectancies in the 70s. Many portions of Africa and Asia are behind, with life expectancies being in the 40s, 50s, and 60s. As the world hopefully improves economically, health care is going to continue playing a large role. Abbott invested $3.7 billion in research in development in 2010, which is a more than $1 billion increase compared to other recent years.

Risks

Overall, I believe Abbott is a relatively conservative stock investment, but is not without risks. Like other health care companies, they face patent risks and large lawsuits. Abbott must continue to develop new products to replace products that having expiring patents, either organically, through partnerships, or through acquisitions. Increasing regulation is a challenge that Abbott will continue to face.

Humira, a drug for six different autoimmune diseases, accounted for $6.5 billion in sales for 2010, representing nearly 20% of the total sales. This is up from $5.5 billion in 2009 and $4.5 billion in 2008. As stated in the 2010 annual report, Abbott expects Humira sales growth in the low teens for 2011. Humira is an immensely profitable drug, and represents a significant portion of Abbott sales and profitability. Any threats to Humira would affect Abbott very materially.

Conclusion

In conclusion, I find Abbott to be a reasonable value at the current price. The diversified operations in pharmaceuticals, medical devices, and nutrition are impressive, the balance sheet is fair, and I particularly like the focus on expansion into emerging markets. The company’s focus on acquisitions helps the company to reduce risk and strengthen their otherwise lackluster pipeline, but compared to organic growth, this reduces profitability potential and leads to the accumulation of goodwill on the balance sheet.

I consider Abbott stock to be a reasonable buy in the low-mid $50′s. Today’s price is a bit over $51.

Full Disclosure: I own shares of ABT, JNJ, BDX, and MDT.
You can see my full list of individual holdings here.

Information used in this report came from official Abbot material, including the 2010 annual report, as well as other sources external to Abbott.

Further Reading:
Johnson and Johnson (JNJ) Dividend Stock Analysis
National Presto (NPK) Dividend Stock Analysis
Becton Dickinson (BDX) Dividend Stock Analysis
AZZ Incorporated (AZZ) Dividend Stock Analysis
AGL Resources (AGL) Dividend Stock Analysis

 Dividend Insights Newsletter

We respect your email privacy

Weekend Reading 4/16/2011

Dividend Stocks 101: The Essential Guide
If you’re new to the site, check out this key resource.

15 Dividend Stocks with 15% Yield in 15 Years
D4L (Dividends Value), recently moved to a new site, and here he puts forth examples of the power of dividend growth.

Nestle Dividend Analysis
Dividend Growth Investor analyzed Nestle, and concludes that it is a buy for him.

Guardian Capital Group Analysis
The Dividend Guy analyzed Guardian Capital Group.

Dividend Aristocrats
Defensive discussed some of his favorite dividend aristocrats.

Restaurants Industry Comparison
The Dividend Pig has analyzed four restaurant companies with dividends, and has offered a comparison.

High Yield Canadian Stocks Part 1
Dividend Ninja provided a great resource for Canadian dividend investors.

Future of the Stock Market
Dividend Partisan offers some facts regarding bull markets and the current market.

My Favorite Free Stock Screeners
My Own Advisor states what his favorite stock screeners are. Screens can help find hidden values, or help us find something obvious we may have otherwise missed.

 Dividend Insights Newsletter

We respect your email privacy