Dividend Aristocrats Part 30: Abbott Laboratories (ABT)

Expected Total Returns

Abbott Laboratories has an expected earnings-per-share growth rate of 10% a year over the next several years.

In addition, the company currently has a 2.1% dividend yield.

Investors in Abbott Laboratories should expect total returns of around 12% a year going forward from dividends and earnings-per-share growth.

An investment that grows at 12% a year doubles in value every about every 6 years.  Not bad for a well-established health care business with fairly low risks thanks to its strong competitive advantage.

Is Abbott Laboratories Over-Valued?

Abbott Laboratories is currently trading for an adjusted price-to-earnings ratio of 20.3.

This number uses adjusted earnings, not GAAP earnings. The company’s adjusted earnings do not include amortization expense and other items. The adjusted earnings give a more accurate picture of Abbott Laboratories’ true earnings power.

With a price-to-earnings ratio of 20.3, Abbott Laboratories is not a value play.  The company does possess a strong and durable competitive advantage and double-digit expected total returns.

Abbott Laboratories’ price-to-earnings ratio is around 10% below the S&P 500’s price-to-earnings ratio of 22.0, despite Abbott having a greater expected growth rate and a comparable dividend yield.

I believe Abbott Laboratories to be trading around fair value at current prices.  The company’s historical price-to-earnings ratio is a poor guide to use as Abbott’s spin-off of AbbVie Inc (ABBV) at the end of fiscal 2012 significantly altered the company.

Final Thoughts

Abbott Laboratories’ stock has only risen 4.8% in the last year due to a strong United States dollar.  The strong dollar hurts the company’s reported results as it must translate its earnings back to dollars.

Despite this short-term headwind, Abbott Laboratories has favorable long-term growth prospects.

Additionally, the company is likely trading around fair value.

Abbott Laboratories is among the highest quality dividend growth stocks in the health care industry. The health care industry itself is among the best industries to invest; people will always need health care. Long-term thinking dividend growth investors would do well to make Abbott a core holding of their portfolio.

Abbott Laboratories currently ranks in the Top 20 based on The 8 Rules of Dividend Investing.  The company’s solid expected growth rate, decent dividend yield, fairly low payout ratio, and low price standard deviation of just 19.8% should appeal to investors seeking above average total return with lower than average risk.

Disclosure: None