Abbott Laboratories (ABT), the maker of medical diagnostic test kits, enteral nutrition products, and generic medicines, is a 133-year-old company started in 1888 by Dr. Wallace Abbott. In 1929 the company went public, and since then, has increased in value by approximately 10,000 times.
Today, the company is considered a large-cap value stock that operates in more than 160 countries. It is also one of only a few stocks traded anywhere that has increased its dividend every year for the past 50 years.
Abbott Labs has two unique traits that make it a great stock to own during inflationary periods.
The first is its ability to pass along its increased costs of goods sold to its customers. Abbott can do this because it sells products vital to patient health that either cannot be purchased anywhere else, or cannot be purchased less expensively. Because of this pricing power, the company can raise its prices to offset the inflationary pressures it feels from purchasing raw materials, etc.
The second thing is that Abbott continues to increase its dividend at a rate that is higher than inflation and is, therefore, returning more income over time than is eroded by inflation. This is a unique type of dividend payer that is especially prized by income investors. The real earning power of this dividend is increasing with time, whereas most savings and investments are losing real earnings power with time.
I believe this stock is not only a great value investment but is also undervalued by the market. As such, I am very bullish on this stock.
Recent Results
Abbott’s stock price has ranged from $105.81 to $139.16 over the last 12 months. I calculate that the intrinsic value of this stock is $157.06. While it is trading very close to its 52-week high, I believe, due to its intrinsic value, that this stock has some room left to reach new highs.
Abbott’s revenues and profits have been buoyed by its Binox COVID-19 rapid test in 2020 and 2021. Abbott released its Q3 earnings data on October 19, 2021. It reported $1.40 earnings per share on $10.93 billion in sales. Analyst estimates had been $0.94 earnings per share on $9.56 billion.
Based on the company’s performance during the first nine months of the year and current market fundamentals, the company should be able to deliver the current earnings estimated by analysts of $4.68 per share over the next year.
After reviewing the company’s current assets, liabilities, and discounted free cash flow, I find that it should have no problem being able to continue to increase its quarterly dividend for years to come. Specifically, the company’s current ratio is 1.83, which means that the company has almost twice as much cash and other current assets on hand to cover its bills over the next year. This, along with great free cash flow from operations, shows that the company will be able to produce increasing dividends for many years into the future.
Dividend
Abbott offers a current annual dividend of $1.88 per share. The company has increased its dividend every year for the past 50 years. Management has committed to continue this increased capital return in the future. In fact, Abbott has increased its dividend by an astounding 23.4% since October 2020. When management backs up their statements of returning shareholder value by amounts as high as that, it shows they not only talk the talk but walk the walk.
Wall Street’s Take
Based on the 13 Wall Street analysts currently offering 12-month price targets, 11 consider this stock to be a Strong Buy. The high estimate for the price of Abbott’s stock is $154 in 12 months while the average estimate is $144. The $154 is very close to the intrinsic value that I calculate, and I feel this stock price estimate is appropriate.
This can be seen on the Abbott Stock Analysis & Rating page.
Abbott also received a “Perfect 10” Smart Score.
This means that the stock is very heavily favored to outperform the market over the next 12 months.
Conclusion
I am bullish on this stock. I feel that at the current price of around $139, it is a good acquisition for any value investor who is looking for exposure to the
pharmaceutical industry. I also find that the company’s ability to pass
along price increases in raw materials, and its outstanding dividend growth rate, make this an outstanding stock to own during inflationary periods.
Disclosure: At the time of publication, Tim O’Rourke did not own shares of any stocks mentioned above.
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