This article originally appeared on The DIV-Net April 13, 2009.
Linked here is a detailed quantitative analysis of Abbott Laboratories (ABT). Below are some highlights from the above linked analysis:
Company Description: Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
ABT is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, ABT is trading at a slight premium. ABT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
ABT earned two Stars in this section for 3.) and 4.) above. ABT has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 37 consecutive years. Its one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
ABT earned both of the available Stars in this section. The NPV MMA Diff. of the $9,495 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as ABT has. ABT’s current yield of 3.63% exceeds the 3.17% estimated 20-year average MMA rate.
Other: ABT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. ABT has a relatively strong product pipeline, with possible significant launches in both the medical device and pharmaceutical areas. The company is financially sound, with a strong balance sheet, excellent return on capital employed and a relatively low dividend payout ratio. In 2008, operating revenues consisted of pharmaceuticals 57%, nutritionals 17%, diagnostics 11%, vascular 8% and other products 7%. In total, foreign sales accounted for 52% of all 2008 sales.
Like all pharmaceutical companies, ABT is facing challenges to their branded patents, drug development and regulatory issues. However, they appear to be in a better position than most of their peers. Other risks include lower-than-expected Humira sales, new generic competition to Synthroid and Biaxin and pipeline disappointments.
Conclusion: ABT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks ABT as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $65.25 before ABT’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 2.45%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 3.2%. This dividend growth rate is significantly below the 8.4% used in this analysis, thus providing a margin of safety. ABT has a risk rating of 1.50 which classifies it as a medium risk stock.
ABT was last reviewed on ABT on July 14, 2008 with0-Star Avoid rating due primarily to its valuation. At the time ABT was trading at $56.43. Since that time I have watched ABT for the right time to initiate a position, and it is currently very close to my buy price of $42.53, and is within range when I add a 5% quality premium to the buy price. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in ABT (0.0% of my Income Portfolio).
What are your thoughts on ABT?