Company Description: Abbott Laboratories is a diversified life science company that is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics. In mid-October 2011, Abbott announced plans to split the company.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
ABT is trading at a discount to 1.) and 3.) above. Since ABT's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 19.8% discount to its calculated fair value of $67.95. ABT earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
ABT earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. ABT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 39 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
ABT earned a Star in this section for its NPV MMA Diff. of the $1,576. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ABT has. If ABT grows its dividend at 8.4% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.6%. ABT earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Memberships and Peers: ABT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Bristol-Myers Squibb Company (BMY) with a 4.2% yield, Johnson & Johnson (JNJ) with a 3.6% yield, and Eli Lilly & Co. (LLY) with a 5.3% yield.
Conclusion: ABT earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks ABT as a 5 Star-Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $80.07 before ABT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 39 years of consecutive dividend increases. At that price the stock would yield 2.6%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.6%. This dividend growth rate is lower than the 8.4% used in this analysis, thus providing a margin of safety. ABT has a risk rating of 1.25 which classifies it as a Low risk stock.
All pharmaceutical companies face the inevitable patent expirations and the ensuing generic competition. However, ABT has a strong product pipeline including potential significant launches in the medical device and pharmaceutical areas. The company's decision in mid-October to split itself into a drug company and a diversified health-care company should result in two well-positioned companies. The spin off should e completed by the end of 2012.
With its strong financials and excellent management team, ABT is in a position to continue its growth (internal, acquisitions and through strategic partnerships) and to generate strong returns. I am currently over-allocated in ABT, and will continue to add to my position while it is trading below my buy price of $68.81 and as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long ABT (5.3% of my Dividend Growth Portfolio) and also held positions in JNJ. See a list of all my dividend growth holdings here.
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Tags: [ABT] [BMY] [JNJ] [LLY]
