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%
-Five year average annual earnings growth rate: 12%
-Five year average annual dividend growth rate: 9%
-Current dividend yield: 3.3%
I think ABT represents a good dividend growth investment as long as the stock price remains under or dips below $56.
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Overview
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 72,000 employees in 130 countries.
The company has $30.8 billion in annual revenue, of which $14.2 billion (46%) comes from the United States and $16.6 billion (54%) comes from other countries.
The Nutritional Products Segment has global sales of $5.3 billion, which is an often overlooked segment of the company despite significant growth and value to the company. Most people just tend to look at the pharmaceutical aspect.
Revenue, Earnings, Cash Flow, and Margins
Abbott has strong growth and consistent performance.
Revenue Growth
| Year | Revenue |
|---|---|
| 2009 | $30.8 billion |
| 2008 | $29.5 billion |
| 2007 | $25.9 billion |
| 2006 | $22.5 billion |
| 2005 | $22.3 billion |
| 2004 | $19.7 billion |
Revenue growth has averaged over 9% annually for the past 5 years. Revenue growth is something I consider to be very important for most of my investments, as it shows an increase in sales and demand instead of just cost-cutting for increased earnings.
EarningsGrowth
| Year | Earnings |
|---|---|
| 2009 | $5.75 billion |
| 2008 | $4.73 billion |
| 2007 | $3.61 billion |
| 2006 | $1.72 billion |
| 2005 | $3.37 billion |
| 2004 | $3.18 billion |
Abbott’s earnings have increased at an average annual rate of over 12% over the past 5 years. This is excellent, especially considering that they also pay out a large and growing dividend.
Analysts predict Earnings-per-Share growth of over 13% for 2010 and and over 12% for 2011. The long-tenured management also seems very optimistic about the future of their company.
Cash Flow Growth
| Year | Cash Flow |
|---|---|
| 2009 | $7.26 billion |
| 2008 | $6.99 billion |
| 2007 | $5.18 billion |
| 2006 | $5.26 billion |
| 2005 | $5.05 billion |
| 2004 | $4.31 billion |
Annualized, Abbott has had average cash flow growth of 11% over the past five years.
Dividend Growth
Abbot currently has a dividend yield of about 3.3%. It is currently near its lowest valuation over the past 5 years in terms of dividend yield. Abbott has paid dividends for 344 consecutive quarters and has increased dividends for the past 37 consecutive years. If you’re looking for reliable passive income streams, this should be on your list to consider.
Dividend Growth
| Year | Dividend | Yield |
|---|---|---|
| 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% |
| 2004 | $1.03 | 2.50% |
Dividend growth has averaged nearly 9% annually for the past 5 years. The dividend payout ratio is only a little over 40%, so their dividend is very-well covered by earnings and should continue to grow.
Share Repurchases
Abbott doesn’t have much in the form of share repurchases to consider. They have repurchased stock consistently, but they’ve issued approximately the same amount. This is fine, as investment return for this company has come from dividends and capital appreciation due to increased earnings.
Balance Sheet
LT Debt to Equity is about 0.49, which is decent. Total debt to equity is 0.72. Overall, this means Abbott has a fairly strong balance sheet. They are neither too conservative nor overly-leveraged. Other healthcare investments that I’ve considered on this site, BDX and JNJ, both have lower debt levels, but Abbott by no means has too much debt.
Investment Thesis
Abbott is consistent, has great historical performance, appears to have great growth potential going forward, and pays a good dividend that increases every year.
Abbott acquired Solvay Pharmaceuticals which according to the 2009 annual report adds $2.9 billion in revenue to the company and more than doubles the company’s presence in emerging markets.
Abbott management expects to further double their emerging markets presence over the next 5 years. This is key.
I am in favor of the healthcare industry currently, at least when it comes to investing. There has been fear due to healthcare reform in the United States, but fear often presents excellent investment opportunities. Abbott has great products that are in demand all over the world and they are among the most well-managed companies of the bunch. Be careful when investing in healthcare, though, as some of them might be value-traps at the moment. Many healthcare companies out there have very low P/E ratios because their drug pipelines are unclear or unimpressive. Abbott currently has a P/E ratio of a little over 14, which puts it at a premium compared to some of its peers, but this is because it has a very strong pipeline and excellent diversification. It’s value is similar to that of Johnson and Johnson, as they are both best of breed. Compared to the rest of the market, which I think has gotten ahead of itself, these companies are undervalued despite being safe, reliable, growing, and profitable companies.
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 well-behind, with life expectancies being in the 40s, 50s, and 60s. As the world hopefully improves economically, healthcare is going to continue playing a large role.
Risks
Overall, I believe Abbott is a relatively conservative stock investment, but is not without risks. Like other healthcare companies, they face patent risks and large lawsuits. Abbott has a very strong pipeline, but they must continue to develop new products to replace products that having expiring patents. This creates more risk than a company that sells simple products like snacks. Healthcare reform, now passed, has an unclear effect on the future of the US healthcare system but shouldn’t adversely affect Abbott that much. It may even help them. Abbott’s consistent and growing dividend is among the surest in the industry, so you should be able to rely on consistent passive income for years to come with an investment in Abbott.
Conclusion and Valuation
I believe Abbott represents a good investment opportunity under $56 per share. With 12% earnings growth backed by good cash flow growth and growing revenue, Abbott should provide good capital appreciation for the patient investor. In addition, the 3.3% dividend yield with annually growing payouts presents a good passive income stream, and this dividend is very well-covered.
Full Disclosure: I own shares of JNJ and BDX, but not ABT as of this writing.
You can see my full list of individual holdings here.
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great post as usual!