Company Description: Abbott Laboratories is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices and diagnostics.
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
Abbott Laboratories is trading at a discount to 1.) and 3.) above. Since Abbott Laboratories's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 23.7% discount to its calculated fair value of $68.81. Abbott Laboratories 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%
Abbott Laboratories earned two stars in this section for 1.) 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. Abbott Laboratories 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
Abbott Laboratories earned a star in this section for its NPV MMA Diff. of the $1,533. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as Abbott Laboratories has. If Abbott Laboratories grows its dividend at 8.4% per year, it will take two years to equal a MMA yielding an estimated 20-year average rate of 4.0%. Abbott Laboratories earned a check for the key metric 'Years to >MMA' since its two years is less than the five-year target.
Memberships and Peers: Abbott Laboratories is a member of the S&P 500, a Dividend Aristocrat, 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 4.6% yield, Johnson & Johnson (JNJ) with a 3.5% yield, and Eli Lilly & Co. (LLY) with a 5.1% yield.
Conclusion: Abbott Laboratories 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 Abbott Laboratories as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $74.47 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 2.52%.
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 5.0%. This dividend growth rate is below the 8.4% used in this analysis, thus providing a margin of safety. Abbott Laboratories has a risk rating of 1.75 which classifies it as a medium risk stock.
All pharmaceutical companies face the inevitable patent expirations and the ensuing generic competition. However, Abbott Laboratories has a strong product pipeline including potential significant launches in the medical device and pharmaceutical areas.
In addition to pharmaceutical, Abbott Laboratories will also rely on its diagnostics business, nutritional division, and an emerging vascular group to generate future earnings. With its strong financials and excellent management team, Abbott Laboratories is in a position to continue its growth (internal, acquisitions and through strategic partnerships) and to generate strong returns. I 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 in Abbott Laboratories (4.9% of my Income Portfolio) and also held a positions in Johnson & Johnson. See a list of all my income holdings here.
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