Company Description: This diversified health care products company 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 premium to all four valuations above. Since ABT's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 108.8% premium to its calculated fair value of $30.26. ABT did not earn any Stars in this section.
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 one Star in this section for 1.) 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 company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 46 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
The negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in ABT would be less than a similar amount invested in MMA earning a 20-year average rate of 2.64%. If ABT grows its dividend at 3.8% per year, it will never equal a MMA yielding an estimated 20-year average rate of 2.64%.
Peers: The company's peer group includes: Bristol-Myers Squibb Company (BMY) with a 2.4% yield, Johnson & Johnson (JNJ) with a 2.5% yield, and Eli Lilly & Co. (LLY) with a 2.8% yield.
Conclusion: ABT did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks ABT as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $36.16 before ABT's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 46 years of consecutive dividend increases. At that price the stock would yield 3.1%.
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 9.2%. This dividend growth rate is higher than the 3.8% 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 44% (down from 54%) is well below my maximum. In addition, its debt to total capital of 47% (up from 43%) is slightly above my preferred maximum of 45%. The stock is trading at a significant premium to my calculated fair value of $30.26. That, its low yield and dividend growth rate 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,
