Abbott Laboratories is one of the best dividend companies listed in the New York stock exchange. Its status as a dividend aristocrat shows just how consistent and committed it is to rewarding shareholders with increasing dividends every year.
Business Overview
Founded in 1888 and headquartered in Chicago, Illinois, Abbott Laboratories operates across four segments in the health and wellness arena: Established Pharmaceutical Products; Diagnostic Products; Nutritional Products; and Medical Devices. It is through these four segments that it seeks to achieve the goals of its business model – to discover, develop, manufacture, and sell healthcare products worldwide.
The Established Pharmaceutical Products segment delivers generic pharmaceuticals to the market. These cover a wide range of conditions, including irritable bowel syndrome; depression; gynecological disorder; hormone replacement therapy; hypertension; hypothyroidism; migraine; as well as influenza vaccine, and products to regulate physiological rhythm of the colon.
The Diagnostic Products segment delivers laboratory systems across areas that include immunoassay; hematology; molecular diagnostics systems; rapid diagnostics lateral flow testing products; cardiometabolic test systems; drug and alcohol test; remote patient monitoring and consumer self-test systems; and molecular point-of-care testing for HIV, SARS-CoV-2, influenza A and B.
The Nutritional Products segment delivers pediatric and adult nutritional products.
The Medical Devices segment delivers devices for rhythm management; electrophysiology; heart failure; vascular; and treatment of cardiovascular diseases. It also provides diabetes care products and devices to manage chronic pain and movement disorders.
Business Performance
Over the last 10 years, Abbott Laboratories has increased its annual revenues from around $19 billion to $43 billion in 2021. This stellar growth can be attributed to several factors. In 2016, the company undertook to acquire two companies – St Jude Medical and Alere. These acquisitions had an immediate positive impact on revenues, as can be seen from the charts below. Its business model and segmented operations were also perfectly aligned with the world’s healthcare needs during the Covid pandemic.
To complete the purchases of Alere and St Jude Medical, Abbott Laboratories issued a very substantial number of shares. This has put a big dent on its EPS numbers for the first couple of years. However, as the company paid down its debt (net debt now stands at $8.25 billion vs $15.8 billion in 2018) and its EPS has also substantially improved.
In its third quarter report, Abbott Laboratories announced quarterly earnings per share of $1.15. However, this was before adjustments which included non-recurring intangible amortization expenses. When these are included, GAAP EPS fell around 31% year-on-year, to $0.81.
Revenues were 4.7% lower year-on-year, though they did improve by 1.3% when measured on an organic basis.
Growth Prospects
With lower revenues and lower EPS, it now becomes clearer why the market hit the shares so hard on the back of the third quarter numbers. So, how did each segment fare? Here are the numbers you need to know:
- Established Pharmaceuticals – Sales rose by 4.9% (+12.2% on an organic basis)
- Medical Devices – Sales fell by 0.5% (but increased by 6.4% on an organic basis)
- Nutritional Products – Sales fell by 14.9% (and were down 10.3% on an organic basis)
- Medical Devices/Diagnostics – Sales were down by 6.2% (-0.6% on an organic basis)
The big loser is the Nutritional Division. The slump here was driven by a 22% fall in pediatric nutrition sales, where revenues were smashed by the February shutdown of infant formula production in its Abbott’s Sturgis, MI, facility, and impacted negatively by challenging conditions in China.
Sales were also negatively impacted by the decline in Covid testing sales.
Abbott Laboratories’ issues with its infant formula production are now behind it. While China is a difficult region to negotiate. Then again, once China emerges from its Covid challenges, Abbott Laboratories’ sales could improve there too.
Abbott’s management is bullish about its prospects. It has increased its 2022 EPS guidance from $3.75 to $3.81 on a GAAP basis, and to a projects-adjusted diluted EPS of $5.17 to $5.23.
It has also launched the FreeStyle Libre 3 system. This provides the most accurate up-to-the-minute glucose readings in the world’s smallest and thinnest wearable sensor.
With its manufacturing stoppage behind it, new products coming on board, and the winding down of Covid testing sales fully discounted, the future looks bright for shareholders of Abbott Laboratories.
Dividend Profile
Currently, the dividend yield is around 1.92%, with a dividend cover of more than 2x. That’s impressive, and even more so when you consider the cash flow dynamics: free cash flow has increased from $4.9 billion to more than $8.6 billion since 2018.
With gross margins of more than 50%, good positive cash flow, and net debt of only $8.25 billion, there is no reason shareholders shouldn’t look forward to further annual increases in the dividend.
Business Risks
What could dent optimism for Abbott Laboratories?
There may always be one-off events, such as manufacturing issues. In Feb 2022, Abbott initiated a recall of its infant formula products and closed its Michigan plant in February after reports of serious bacterial infections in four infants. This may quickly lead to consumer’s distrust in Abbott’s formula brand.
The recall has also resulted in a shortage of baby formula on shelves, which may prompt consumers to switch brands.
The company however, has been quick to take action. It recently announced that it will invest $500 million in a new factory to make infant formula, as well as take corrective actions to address issues raised by federal inspectors.
Of course, higher interest rates and a weaker global economy could be a drag on sales and affect its bottom line – but the company has intelligently paid down its debt, and that should prove something of a cushion to its bottom line.
While there is also the effect of rapidly declining sales from its Covid portfolio – then again, Sales of diagnostics and test devices related to Covid were never going to be a long-term strategy anyway. The company was in the right place at the right time with the right products to boost its income and reduce its debt.
Good fortune or good business management? You decide.
Final Thoughts
There are headwinds that could put the brakes on growth at Abbott Laboratories. But it’s unlikely that these will impact the dividend. Indeed, Abbott Laboratories management is proud of its status as an S&P 500 Dividend Aristocrat, and that it has now paid a dividend for 395 consecutive quarters.
After almost 100 years of uninterrupted dividend payments, it’s unlikely that shareholders will not continue to be rewarded in cash every quarter.
Analysts expect a modest fall in revenues in 2023 (down 9%), because of the Covid effect. But Abbott Laboratories has an uncanny habit of surprising with its earnings. The average 12-month share price target at the time of writing is $117.05.
In conclusion, for dividend investors, Abbott Laboratories should be considered a certain hold, and a good buy in today’s market. Sellers may regret the decision.