Dividend Aristocrat in Focus: Abbott Laboratories (ABT)

The Dividend Aristocrats are a select group of currently 57 S&P 500 stocks with 25+ years of consecutive dividend increases. These 57 are large, US companies that have historically provided (slightly) better performance and (slightly) lower volatility than the S&P 500 as a whole.

S&P 500 applies the following criteria to construct the Dividend Aristocrats list:

• must be members of the S&P 500
• must have increased dividends every year for at least 25 consecutive years
• Market Cap at least USD 3 billion
• Liquidity at least USD 5 million (average daily value traded)
• Diversification, at least 40 constituents and not sector allocation above 30%

Read more about the dividend aristocrats’ performance or check-out the European dividend aristocrats.

There are currently 66 Dividend Aristocrats. You can download an Excel spreadsheet of all 66 (with metrics) for FREE by joining our newsletter:

 

This “in focus article” will discuss several aspects of the dividend aristocrat Abbott Laboratories (ABT) and why the stock could be attractive for income investors based on our Dividend Score. Our Dividend Score System takes into account several fundamental and technical metrics that affect a company’s ability to continue paying dividends and its overall return.

 

Abbott Laboratories (ABT) overview

 

	Dividend Score
	74
Dividend	Dividend Yield	DGR 3 years
1.28	1.50%	5.27%

Data: December 6th, 2019

Business model and growth perspective

Founded in 1888, Abbott Laboratories (ABT) is one of the world’s largest medical companies, with a portfolio of leading offerings in four main segments:

• Nutritional Products
• Branded Generic Pharmaceuticals
• Diagnostics
• Medical Devices

Abbott spun off its research-based pharmaceuticals business AbbVie (ABBV) in January 2013. Abbott is a dividend aristocrat when adjusted for the AbbVie spin-off. The company has paid dividends for 95 straight years and raised its dividend for 47 consecutive years.

For the quarter Q3-2019, Abbott met analysts’ expectations with a sales growth of 7.6% on an organic basis (5.5% reported) and adjusted diluted earnings per share (EPS) of 84 cents (53 cents reported), an increase of 12% versus last year. Looking ahead, ABT increased its EPS forecast for 2019 to $3.23 to $3.25.

Abbott’s business is truly global, with 65% of sales coming from outside the U.S. and 41% of revenue generated in faster-growing emerging markets where healthcare spending is outpacing the growth of GDP. ABT is well-positioned for the silver economy in every region.

Source: ABT Investor Presentation

Analysts expect an annual adjusted earnings-per-share growth of 6% moving forward.

Dividend history and dividend growth

It is important that companies that can maintain or even increase their dividend payments in bad times. This is an indication that the company has a strong market position in a stable business that performs well throughout the economic cycle.

This year ABT increased its quarterly dividend to $0.32/share, which is a 14.3% increase from prior dividend of $0.28. The 3-years dividend growth is 5.27% per year, which is “average”. The annual dividend increased from $0.88 in 2014 to $1.28 in 2019.

 

Dividend Yield

Abbott Laboratories’ current dividend yield of 1.50% is -27% below its 5-year average. The 5-year average dividend yield is 2.04% (see red-line in the chart). This indicates the stock looks overvalued today.

The dividend payments are reasonably covered by its earnings, given the payout ratio of 59%. Looking forward, its dividends in 3 years are forecast to be well covered by earnings (36% payout ratio). This future payout ratio is decent for this sector, we prefer a payout ratio of around 60%.

Stable cash flow

Without stable cash flow, it is almost impossible to maintain the dividend in times of a downturn. Operating free cash flow and free cash flow are 2 important metrics for a dividend stock. ABT has generated positive free cash flow in each of the last 10 years, which is a sign that ABT’s business has consistently earned enough cash to cover its spending needs, giving ABT more flexibility to maintain its dividend over time.

Low debt ratio

Companies with a low debt ratio have the option of maintaining or even increasing the dividend even during recessions. The (net) debt-to-EBITDA ratio is a great metric to include. The net debt/EBITDA of 1.58 is indicating that ABT’s ratio looks decent. This is around the 1.5 net debt/EBITDA ratio (the lower, the better), we prefer for dividend stocks in this sector.

Valuation

ABT’s forward P/E ratio of 24.4 is well above its 5-year average of 20.4. So, the current valuation is noticeably higher than its long-term average. Therefore, ABT appears to be overvalued, based on relative comparisons to the broader market, as well as to its own historical average.

Recession performance

Price-performance

Year-to-date ABT is trading up 20.4%, which is in line with the S&P 500 performance. The 10-year geometric annual performance is 13.4% annually. Looking at the win-ratio of 71% and a loss ratio of 1.9, those two ratios are strong and certainly above average for this stock.

ABT’s performance triangle.

 

Final Thoughts

Abbott Laboratories has a recession-resistant and global business model that allows it to continue growing earnings-per-share through various economic environments. The long history of steadily increasing dividend payments confirms this. Overall, we expect ABT to generate 6% annual earnings-per-share growth over the next five years and continue to grow its dividend as well. Both the dividend yield of 1.5% and the 3-years dividend growth rate of 5.27% are somewhat at the low-end.

Since the stock is overvalued based on current PE-ratio’s and dividend yield, our recommendation for long-term dividend growth investors would be “Buy the Dips”.