This article originally appeared on The DIV-Net October 19, 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. The stock is trading at a 21.9% premium to its calculated fair value of $42.18. ABT did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
ABT earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years and another Star was earned as a result of its most recent Debt to Total Capital being less than 45%. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 37 consecutive years.
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 a Star in this section for its NPV MMA Diff. of the $1,066. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ABT has. If ABT grows its dividend at 8.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. ABT earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.
Other: ABT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: ABT did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ABT as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $64.54 before ABT’s NPV MMA Differential decreased to the $500 minimum that I like to see for a stock with 37 years of consecutive dividend increases. At that price the stock would yield 2.48%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.2%. This dividend growth rate is less than the 8.4% used in this analysis, thus providing a slight margin of safety. ABT has a risk rating of 1.50 which classifies it as a low risk stock.
I consider ABT as one of the best pharmaceutical companies. The company has a relatively strong product pipeline, with potentially significant launches in both the medical device and pharmaceutical areas pending. The stock is trading at a 20%+ premium to its buy price of $42.18, so I will patiently wait for market pullbacks before adding to my position. 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 was long in ABT (1.3% of my Income Portfolio). What are your thoughts on ABT?