Last month, the diversified healthcare company Abbott Laboratories (NYSE:ABT) raised its quarterly dividend 4.4% from $0.45 to $0.47 per share. This marked the 50th consecutive year that the stock has increased its payout, which means that the stock will become a Dividend King in the likely event that it sticks with this dividend throughout the year.
But there are also other reasons to buy Abbott. Let’s take a look at three factors that make the stock a buy.
A booming business
Abbott is a well-balanced company that makes money from the following four segments:
- Diagnostics (35.3% of year-to-date revenue).
- Medical devices (33.6% of year-to-date sales).
- Nutrition (19.8% of year-to-date revenue from products such as Ensure and Pedialyte).
- Established pharmaceuticals (11.1% of year-to-date sales from branded generic drugs in international markets).
Since the introduction of its COVID-19 testing kit, Abbott’s diagnostics segment has surpassed the medical devices segment as the largest contributor to the company’s revenue. But what makes Abbott a particularly impressive company is that every segment recorded at least high-single-digit to upper-double-digit growth in revenue through the nine months ended 2021. This explains how Abbott was able to grow its sales 32.2% year over year against the year-ago period to $31.6 billion year to date.
Abbott was able to post $3.89 in year-to-date non-GAAP (adjusted) diluted earnings per share (EPS), representing a 76.8% surge over the year-ago period. This was due to Abbott’s higher revenue base and a 570-basis point expansion in its non-GAAP net margin to 22.2%.
As a result of Abbott’s solid business performance in the nine months of 2021 reported thus far, the company raised its guidance for the year from the previous midpoint of $4.40. Abbott now expects to produce $5.05 in midpoint adjusted diluted EPS in 2021, which is equivalent to a 38.4% growth rate over the 2020 adjusted diluted EPS base.
Considering Abbott is known for consistent innovation throughout its businesses, analysts expect that the company’s annual earnings growth will accelerate from 8% over the last five years to 13% in the five years ahead.
The payout should keep growing
Abbott seems to be a thriving business based on its growing sales and profitability. The second reason the stock looks like it could be a good buy for dividend growth investors has to do with its sustainable dividend.
The company has paid out $1.80 in dividends per share in 2021, which works out to a 35.6% dividend payout ratio considering the $5.05 in non-GAAP diluted EPS midpoint forecasted for the year. For context, this is moderately lower than even Dividend King Johnson & Johnson‘s (NYSE:JNJ) payout ratio that is set to be 42.8% in 2021.
This payout ratio gives Abbott the flexibility to grow its dividend in line with earnings for the foreseeable future, which should translate into at least high-single-digit dividend growth. Pairing this kind of dividend growth with the stock’s market-beating 1.4% yield is an attractive combo.
While I was expecting a bigger increase in Abbott’s payout last month, it’s important to keep in mind that the stock raised its dividend by 25% in 2020. The bottom line is that Abbott looks to be set for nice dividend growth in the years to come.
A reasonably priced Dividend King
Over the last five decades, Abbott has proven itself as one of the highest-quality businesses in the world. But even with the best stocks, it’s critical to not grossly overpay to maximize your starting dividend yield and total return potential. Fortunately, Abbott appears to be a reasonable value, even after a 29% run-up in its stock price last year.
At the current $136 share price, Abbott is trading at 26 times its trailing 12 months free cash flow per share of $5.20. This is slightly lower than the stock’s 13-year median price to free cash flow of 26.5. Given that Abbott’s fundamentals are arguably better than ever since it rolled out its COVID-19 tests, I believe there is room for the valuation multiple to go higher without the stock being overvalued. This makes Abbott a great stock for dividend growth investors to consider buying in 2022.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.