The pharmaceuticals industry provides investors with one of the most lucrative investment sectors in the U.S. and this receives backing from the statistics of the industry, being the most profitable recording sales of more than $300 billion annually. Among the companies in this industry is Abbott Laboratories (NYSE:ABT) along with Merck & Company (NYSE:MRK) and Sanofi (NYSE:SNY). Here you will get to know exactly why Abbott Laboratories is your stock pick of choice by analyzing the dividend yield, dividend history, dividend payout, debt to equity ratio, cash flow, profitability and how it compares with peers.
Abbott Laboratories Analytical Overview
Abbott Laboratories is one of the top companies displaying strong investment fundamentals. The company stock has an annual dividend of over $2, which represents a forward annual dividend yield in the region of 3.50%. On the other hand, close peers like Merck & Company and Sanofi have annual dividends of below $2 each, despite reporting a forward annual yield of about 4.50% each. This is a clear indication that the Abbott Laboratories annual dividend yield is still set to rise and hence the stock price. In terms of payout, Abbott Laboratories pays its dividend at a rate of 62% compared to Sanofi’s payout of 48%, which is quite below the industry threshold. Merck & Company pays at a high rate of 77%, raising questions of sustainability.
Over the last three decades, Abbott Laboratories dividends have been growing consistently at an average of 10% year on year. This trend, coupled with the strong fundamentals that form the highlight of the giant pharmaceutical, is what promises yet another bright future for the stockholders of Abbott Laboratories. The company pays dividends on a quarterly basis and the current schedule includes four instalments of about $0.48 per quarter, the best ever so far.
Assessing Abbott Laboratories gearing ratio in comparison to industry peers, there is a clear image depicting the excellent management of the company. The company’s debt to equity ratio is around 62, which represents about 44% of debt in the company’s cost of capital. On the other hand, Merck & Company and Sanofi have debt to equity ratio of about 40 and 27 respectively, representing about 25% and 15% of debt in the cost of capital in that order. This indicates a very high cost of capital in the sense that the majority of the cost of capital is not a tax-deductible expenditure. A direct opposite of this fact, is however, the case of Roche Holding AG (RHHBY.PK) which has a debt to equity ratio of about 185, quite a highly geared company.
Profit wise, Abbott Laboratories has a profit margin of about 12% and an operating margin of about 21%. Sanofi’s profit margin is about 16% and has an operating margin of about 22% which are slightly impressive figures compared to Abbott Laboratories. On the other hand, Merck & Company reported a profit margin of about 13% coupled with an operating margin of about 22%. The outlier for the industry in this category was Roche Holding AG, reporting a profit margin of about 22% and an operating margin of around 33%, which is quite different from the rest. However, looking at Abbott Laboratories, Merck & Company, and Sanofi, it is quite clear that Abbott Laboratories is paying more interest expense than the two competitors as depicted by the differences in profit margin, despite closer operating margins.
Abbott Laboratories reported the highest cash flows in 2011 compared to its peers. However, the healthy stream of cash flows from Merck & Company shows a strong financial position for the company as represented by figures of about $5 billion in 2009, $1.5 billion in 2010 and most recently $2.6 billion. The most recent year on year report represents an increment of over 90% in 2011 compared to 2010. Nevertheless, the negative cash flow reported by Abbott Laboratories in 2010 comes from the high investments done during the year, surpassing the tune of $11 billion.
Abbott Laboratories Latest Events and Developments
Abbott Laboratories recent investment in pharmaceuticals widens its portfolio. The company signed a deal with Galapagos for the development of an oral next generation inhibitor, after which the drug becomes ready for sale on the market. A peer company Sanofi, also is in the news, having received approval to distribute Framingham in Jan 2012 from U.S. Food and Drug Association. This widens the distribution channel for Sanofi through its subsidiary, Genzyme.
Being a pharmaceuticals company, Abbott Laboratories can take pride in the recent won battle which resulted in FDA allowing pharmaceutical companies to continue study on painkillers. This gives them the opportunity to try different alternatives, thereby resulting in an increase in revenues in the end. A different ruling by the FDA would have meant limitations on more testing and study.
Analysts Objective Opinion
When you take into consideration the recent news shown with Abbott Laboratories and the positive financial numbers previously analysed, it is my belief that this company represents a strong stock buying opportunity. Despite having a five year expected price earnings growth ratio (PEG) of about 1.4, the company does have strong fundamentals, which guarantee a consistent growth in dividend as evidenced in the dividend history as well as promising cash flows.
The company’s stock is rallying, and recently attained a 12-month high of about $58 per share. In actual sense, the stock price has been rising for the last 12 months at least on a month-to-month basis. It is one of the most stable stocks as this increment in price has been very consistent. The company pays a healthy dividend of about $2, which is well above its peers and therefore gives investors another reason to stick with the stock or alternatively acquire it.
About the author:
At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.
If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.