A Growth Stock in Aristocrat’s Clothing

April 11th, 2013
in contributors

Investing Daily Article of the Week

by John Persinos, InvestingDaily.com

Investors seeking safety and a steady stream of income gravitate toward the “Dividend Aristocrats,” long considered the gold standard for dividend-producing stocks.

There’s one Dividend Aristocrat that now offers both robust growth and reliable income, giving investors the best of both worlds: Abbott Laboratories (NYSE: ABT). This Chicago-based pharmaceutical and medical products manufacturer has raised dividends for 40 years in a row. The stock's price also has enjoyed an impressive run, with more upside to come.

To earn the honorific Dividend Aristocrat, a company must typically have raised dividends for at least 25 years. More precisely, the company needs to have a managed dividend policy that increased its dividend every year for those 25 years.

Follow up:

These dividend powerhouses constitute the “S&P 500 High Yield Dividend Aristocrat Index,” an official index of the 50 highest dividend yielding stocks in the S&P Composite 1500. This Aristocrat Index is maintained by Standard & Poor’s, which every December updates the list of companies that make the grade.

By its very nature, a Dividend Aristocrat tends to be a large and stable blue-chip company with a strong balance sheet. Many of these companies are familiar names that produce household brands.

Abbott consistently makes S&P’s list of Dividend Aristocrats and 2012 was no exception. With a market cap of $53.6 billion, Abbott serves customers in more than 150 countries and employs approximately 70,000 people.

The company operates across four business segments: Branded Generics, Medical Devices, Diagnostics and Nutrition. These businesses provide a diversified customer base and payer mix.

Abbott offers a wide range of medical devices and diagnostic tests used worldwide by doctor’s offices, hospitals, laboratories, and blood banks to diagnose, monitor and treat diseases such as cancer, HIV, hepatitis, heart failure and metabolic disorders. The company also provides point-of-care cardiac assays for emergency rooms.

Despite the checkered global economy in 2012, the company more than held its own — an indication that even greater performance is ahead this year, as economies around the world gather steam.

For full-year 2012 ending in December, Abbott generated total sales of $39.87 billion, a 5.5 percent year-over-year increase. Full-year earnings reached $5.96 billion compared to $4.72 billion in 2011, a YoY increase of 26.1 percent.

On Jan. 1, 2013, Abbott completed the launch of AbbVie (NYSE: ABBV), a new research based bio-pharmaceutical company. The AbbVie spinoff assumed control of certain Abbott drug brands, including Humira, a treatment for rheumatoid arthritis, psoriatic arthritis, Crohn's disease, and psoriasis; and Synthroid, a synthetic thyroid hormone. Abbott retained diagnostics, medical devices, nutrition and branded generic pharmaceuticals.

The moniker of Abbott’s new branded-drug business, pronounced “Abb-vee,” stems from the name of its parent company as well as “vi,” the Latin root for “life.”

Abbott’s earnings report for fourth-quarter and full-year 2012 represented its last as a unified company prior to its January split. Abbott is scheduled to release first-quarter 2013 earnings on April 18.

In February, Abbott declared a quarterly dividend of $0.14 per share, or $0.56 annualized. The annual yield on the dividend is 1.6 percent. Abbott’s stock is now poised for outsized growth, as it taps into some of the health sector’s biggest opportunities.

To be sure, the company’s spinoff of AbbVie resulted in a lower dividend. However, since the company’s separation announcement in October 2011 to the end of last year, Abbott stock price appreciation and dividends generated a total shareholder return of nearly 30 percent, compared to the S&P 500 return of about 19 percent (see stock price graph, below).

Investors have been rewarding Abbott's strategic move, by which the parent entity cherry-picked the business lines that convey the greatest growth opportunities. Abbott also posted a successful 2012.

Abbott reported fourth-quarter 2012 earnings per share (EPS) of $1.45, a penny above the Street’s estimates and an increase of 11.5 percent from the year-earlier period. Fourth-quarter revenue increased 4.1 percent to $10.4 billion, nearly in line with analysts’ expectations of $10.6 billion.

For the full year 2012, Abbott also generated record operating cash flow of $9 billion, returning more than $3 billion to shareholders in the form of dividends.

Abbott has delivered a 6 percent average increase in annual EPS since 2002. The company earned $5.08 in EPS in 2012; analysts expect EPS of $5.27 in 2013. By comparison, the company earned $3.01 in EPS in 2011.

Political Arm Twisting

Abbott’s competitors are formidable and include such large-cap heavy-hitters as Merck (NYSE: MRK), Sanofi SA (NYSE: SNY) and Roche Holding AG (OTC: RHHBY). However, Abbott is better positioned to profit from secular trends in medical devices and eye care. Abbott also is a better value play.

Investors have punished the medical device sector, ever since Congress in 2009 included a 2.3 percent tax on medical devices in President Obama’s health care reform legislation.

However, this negative sentiment underestimates the ferocity of the medical device industry’s lobbying campaign to repeal the tax.

The tax is designed to raise about $29 billion over 10 years, to help pay for health coverage of the uninsured. The device industry argues that the tax will dampen demand for its products and many lawmakers are sympathetic to this view.

According to the Center for Responsive Politics, device makers have spent more than $150 million on Washington lobbying since 2008. Their efforts are starting to pay off. Last month, the US Senate voted 79 to 20 to repeal the tax and the House is expected to follow suit.

Although the issue hasn’t gotten much media attention, the tax stands a good chance of getting repealed this year — and when it does, companies such as Abbott should enjoy a lift in their long-term prospects, as well as an immediate boost in their stock prices.

The recent recession did little to impede hospitals and other health care providers from buying medical devices. Economic recovery, combined with the likely repeal of the much-resisted device tax, will only help the industry.

Meanwhile, Abbott launched several new products across its operational segments in 2012, such as its Absorb bioresorbable vascular treatment, an advanced drug-eluting stent called Xience Xpedition, and new diagnostics tests.

Eye-Catching Potential

The company’s ophthalmic products are particularly promising. The aging of the world’s population is driving long-term demand for the treatment of eye disorders, a field in which Abbott is a leader.

According to the American Academy of Ophthalmology, three-quarters of eye diseases are age-related. One out of every five Americans — approximately 72 million people — will be 65 years or older by 2030, roughly double the number in 2000.

During the next 15 years in the US, these demographic trends are expected to boost the number of cataract patients by 60 percent. Abbott launched several new vision care products in 2012, primarily in its cataract business, which now represents nearly 65 percent of the company’s vision care sales.

The global ophthalmic devices sector is valued at $15.2 billion per year and is expected to register a compound annual growth rate (CAGR) of more than 4 percent from now until 2017.

According to research firm Lucintel, the global market for all types of medical devices will exceed $302 billion in annual sales in 2017, with a CAGR of 6.1 percent during the next four years.

As one of the world’s largest producers of prescription drugs, diagnostic tests and vision care products, Abbott should profit from these trends and rack up above-average earnings growth in 2013 and beyond.

The company’s profit margins also stand to benefit from its recent expansion into emerging markets, especially India. Abbott is increasingly weighted to the health care sector’s growth in emerging markets; management expects that 50 of the company’s sales will occur in these regions by 2015.

Abbott is currently trading at a discount compared to its peers. The company sports a 12-month trailing price-to-earnings (P/E) ratio of about 9.5, compared to 21.7 for its industry of medical appliances and equipment. Institutional investors own about 70 percent of the company’s shares; the general public holds only about 15 percent.

Analysts’ average five-year annualized earnings growth forecast for Abbott is 9 percent, making this stock a good buy now for both growth and income investors.

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