Every week we pick out a high-quality dividend paying stock from the Dividend Aristocrats Index. As discussed, this index is made up of a stocks that have been consistently growing dividends for well over 25 years running. A track record like that almost instantly guarantees these dividends are top notch, but behind every dividend stock there’s a unique company.
This week we’re taking a closer look at one such company – Abbott Laboratories
Abbott Labs has a long and rich history. Not only is it one of the oldest healthcare companies in the country, but it is also one of the oldest stocks on the market. Founded in 1888 by physician and drugstore owner Wallace Abbott as the Abbott Alkaloidal Company, the company started off as a manufacturer of a unique alkaloid.
These alkaloids were meant for targeted and professional treatment of illnesses. Dr.Abbott’s scientific approach proved to be a success and the first year of operations the company made $2,000 in total sales.
Abbott had successfully isolated the active part of some specific medicinal plants. He ground them up into what he called dosimetric granules and marketed them across the world. The company soon grew into one of the largest pharmaceutical companies on the planet. In fact, the company spread so far and wide that it even had a marketing department in Pakistan and
A joint venture in Japan. The company has been in India for so long that the local subsidiary, Abbott India Limited (NSE: ABBOTINDIA), is listed on the National Stock Exchange in Mumbai.
Today, the core business is focused on pharmaceuticals, medicinal devices, and nutritional supplements. Over the years it has expanded its product range with hundreds of different acquisitions and joint ventures. The company is now a lot more of a global consumer-facing manufacturer. Some of its most popular brands include Similac, Ensure, Glucerna, PaediaSure, EAS and ZonePerfect.
Chairman and CEO Miles D. White has been with the company since 1984.
According to the latest data (2017), Abbott is currently worth $77 billion. Last year sales were nearly $21 billion and net profit was nearly $1.2 billion. The company employs more than 75,000 people across 155 countries.
The profit margin and the overall return on equity are lower than expected. Both the net profit margin and return on equity have averaged around 5% over the past year. Cash flow per share is $1.67 and book value per share is $13.94.
Debt and equity are equally balanced. There is $1 of debt for every $1 of equity, which means the debt-to-assets ratio is 0.5.
Financially, the company doesn’t seem exceptional. It has a broad scope and low margins. Debt isn’t really much of an issue either. The focus, for most investors, would be the juicy dividend.
Abbott Labs is one of those rare health care companies that pays a dividend. In fact, the company has paid a dividend consistently for the past 93 years. The dividend grew last year by nearly 7%. The dividend has grown every year since 1972.
Right now, the dividend is set at $1, which is a 2.4% dividend yield on the $45.24 stock. Surprisingly, the payout ratio is actually higher than 100%. The payout ratio for the past year was nearly 144% of earnings, which means the company is dipping into its cash pile to reward investors. The company has returned nearly $2.1 billion to investors in the form of dividends and share repurchases over the past year.
Altogether, the high-yield and relatively stable dividend seems to be the biggest draw for this stock. So, using the dividend discount model should let us value this stock.
Assuming the required rate on Abbott stock is 17.31% and the rate of dividend growth is 14.66%, here is how the dividend discount model could be used:
Value = next Dividend / rate of return – rate of growth
= $1 x 1.06 / 17.31% – 14.66%
= $1.06 / 2.65%
At the current market price of $45.23, Abbott Laboratories seems to be a little overpriced. The stock is overvalued by nearly 14%.
Abbott Laboratories is an amazing dividend stock with a high yield and a long history of consistent dividend growth. At the current price, the stock is overvalued. Look for opportunities to invest down the line as the earnings pick up or the stock experiences a pullback.
For now, it’s best to just wait and watch.