Abbott Labs: Emerging Market Health Care Dividend Aristocrat

Abbott Labs (ABT) is one of the oldest and largest health care businesses in the world.  The company was founded back in 1888.

Today, Abbott Labs has a market cap of $56 billion, making it the 20th largest publicly traded health care stock available in US markets based on market cap according to Finviz.

Abbott Labs could be much bigger today than it is…

The company spun-off pharmaceutical behemoth AbbVie (ABBV) at the beginning of 2013.  AbbVie has a $99 billion market cap.  Together, these companies would be the 5th largest health care corporation publicly available in the US, behind only:

  1. Johnson & Johnson (JNJ) with a $324 billion market cap
  2. Pfizer (PFE) with a $212 billion market cap
  3. Novartis (NVS) with a $203 billion market cap
  4. Merck & Co (MRK) with a $160 billion market cap

What stands out about Abbott Labs today is the company’s global presence combined with stability.

Abbott Labs currently generates 50% of its revenue in emerging markets.  In total, the company gets 70% of its revenue internationally.  Abbott Labs has the growth prospects of an emerging markets business.

But, the company also has the stability, financial transparency, and management techniques of a high quality 1st world blue chip business.

Case-in-point:  Abbott Labs is one of just 50 Dividend Aristocrats, stocks with 25+ years of consecutive dividend increases in the S&P 500.

With Abbott Labs, you get the best of both worlds:

  • Emerging market growth potential
  • Blue-chip US stability

Pending Acquisitions

Abbott Labs’ has positioned itself for growth in emerging markets.  The company has 2 large pending acquisitions that will shape the company over the next several years:

  • Acquisition of Alere (ALR) for $5.8 billion
  • Acquisition of St. Jude Medical (STJ) for $25 billion

Abbott Labs management is nothing if not active.  As discussed earlier, the company is not afraid to sell or spin-off large swaths of its business.  It is also not afraid to make timely acquisitions.

Both acquisitions listed above are expected to add to earnings-per-share within the first full fiscal year after closing.

The Alere acquisition will add to Abbott Lab’s diagnostics segment, while the St. Jude acquisition will improve Abbott Lab’s medical devices segment.

Competitive Advantage

Abbott Labs competitive advantage is a mix of its large size and global operations.

The company has invested significantly in emerging markets.  Abbott Labs emphasizes manufacturing products in the same countries in which the products are sold.  The rationale behind this is to build connections with local governments, businesses, and communities.

In addition, Abbott Labs also owns many of the most trusted and recognizable brands in nutrition, including:

  • Pedialyte
  • Similar
  • Ensure

The company’s strong competitive advantage and presence in the health care sector helps the company to be recession resistant.

Abbott Labs grew earnings-per-share each year through the Great Recession.  Health care stocks in general tend to perform well during recessions because both consumers and governments have a difficult time cutting back on health care expenditures regardless of the overall economic climate.

Valuation & Dividends

Abbott Labs price-to-earnings ratio has averaged around 19 since it spun-off AbbVie.  The S&P 500 currently trades for a price-to-earnings ratio of 24.1.

The question investors should ask themselves is:  Is Abbott Labs a ‘better than average’ stock in the S&P 500?

If the answer to that questions is ‘yes’, then Abbott Labs should trade for a price-to-earnings multiple at least in line with the S&P 500.

Interestingly, Abbott Labs currently trades for an adjusted price-to-earnings ratio of just 18.1.

Note:  Adjusted earnings for Abbott Labs are from the company’s press releases and exclude certain amortization charges, acquisition charges, and other one-time items.  Adjusted earnings at Abbott are a better gauge of true underlying earnings power for the company.

Based on both its historical price-to-earnings ratio compared to its current price-to-earnings ratio, and its current price-to-earnings ratio compared to the S&P 500’s current price-to-earnings ratio, Abbott Labs is undervalued.

I believe the company should trade at least in line with the S&P 500 given its strong growth prospects, safety, and above average dividend yield of 2.7%.

Abbott Labs is ranked as a Top 10 dividend growth stock and a buy using The 8 Rules of Dividend Investing thanks to its strong competitive advantage, long history of rewarding shareholders with rising dividends, and likely undervalued status.