Company Description: Abbott Laboratories is a diversified health care products company that is now focused on nutritionals, diagnostics, generic drugs, and medical devices, following the spinoff of its R&D-based prescription pharmaceuticals business at the beginning of 2013.
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 only 1.) above. When also considering the NPV MMA Differential, the stock is trading at a 22.7% discount to its calculated fair value of $54.16. 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 two Stars in this section for 2.) and 3.) above. 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 44 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 $1,286. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ABT has. The stock's current yield of 2.48% exceeds the 1.81% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Bristol-Myers Squibb Company (BMY) with a 2.7% yield, Johnson & Johnson (JNJ) with a 2.7% yield, and Eli Lilly & Co. (LLY) with a 2.6% yield.
Conclusion: ABT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ABT as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $65.21 before ABT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 44 years of consecutive dividend increases. At that price the stock would yield 1.6%.
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 4.1%. This dividend growth rate is lower than the 8.3% used in this analysis, thus providing no margin of safety. ABT has a risk rating of 1.75 which classifies it as a Medium risk stock.
ABT discovers, develops, manufactures and sells health care products. Its products include branded generic pharmaceuticals manufactured internationally, marketed and sold outside the United States. The company enjoys strong positions in several health care product categories and global markets, with a focus on expansion in emerging markets.
The company's efforts to improve efficiency have focused on streamlining its distribution channels and building facilities in lower-cost locations like China and India. These efforts have seen some success. ABT's emphasis on margin improvement should begin to reap benefits over the next several years.
The company's free cash flow payout of 92% (up from 65%) is well above my maximum. However, its debt to total capital of 30% (up from 28%) is well below my preferred maximum. Although it is trading at a slight discount to my calculated fair value of $54.16, its poor Free Cash Flow Payout keeps me from opening a position in the stock.
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 held no position in ABT (0.0% of my Dividend Growth Portfolio) and was long in JNJ. See a list of all my Dividend Growth Portfolio holdings here.
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Tags: ABT, BMY, JNJ, LLY,
