This article is part of our weeklong series on 11 incredible dividend stocks. You can get the low-down on this series by clicking here.
There are quite a few drug companies that have larger dividend yields than Abbott Labs
But bigger isn't always better when it comes to dividends. Counterintuitively, growth should play a big part in picking a dividend stock since the ability to grow the dividend rests on the company's ability to grow cash flow.
Unlike Pfizer
The business
Abbott is more than just a drug company. The mini-conglomerate offers some diversification beyond pharmaceuticals through Similac baby formula and other nutrition products, diagnostics, and vascular sales, which includes medical devices like its drug-eluting stents. Abbott has even ventured into generic drugs through its acquisition of Piramal's Healthcare Solutions business.
That being said, drugs are still the cornerstone of the company. In 2010, pharmaceutical sales made up more than half of total sales. And drugs are the driving force of the company. Pharmaceutical sales grew 20.7% in 2010, although some of that was through acquisitions rather than internal development.
| Company | Abbott Labs |
|---|---|
| Dividend Yield | 3.7% |
| Five-Year Avg. Dividend Growth Rate | 10% |
| Payout Ratio | 61% |
| Has Paid Dividend Without Interruption Since | 1924 |
| Streak of Consecutive Annual Dividend Increases | 39 years |
Sources: Yahoo! Finance, Capital IQ (a division of Standard & Poor's), and company press releases.
Why it's incredible
Abbott isn't exactly high-growth. Going from zero to one drug as biotechs such as Dendreon
But I wouldn't put Abbott in a category with sloth-like dividend stocks either. EPS growth over the last five years has averaged a solid 5.7%. Add in a growing dividend, and you're bound to get some capital appreciation if the trend continues.
Dividend strength
Abbott's been paying a dividend since 1924 and the company flaunts that fact in every dividend declaration announcement. They might as well change the name of Abbott's home town from Abbott Park to Dividend Park. Abbott isn't going to give up its dividend.
Not only will the dividend continue, but it's likely to grow. The company has increased its dividend for 39 consecutive years, and I don't see that streak stopping anytime soon.
In 2010, Abbott paid out less than 35% of its free cash flow in the form of a dividend. That leaves plenty of cash to fund acquisitions and licensing deals. Considering it increased the free cash flow by 25% year over year in 2010, there's no reason to think dividend growth can't continue.
Risks
Like any pharmaceutical company, Abbott is reliant on patents to protect its drugs. When they run out, generic drugs enter the market and sales of the drug drop precipitously. For Abbott this is particularly problematic because one drug, Humira, brought in $6.5 billion in 2010.
Abbott has tried to diversify away from Humira through acquisitions and developing other products. But, for better or worse, Humira kept growing as well; year-over-year growth in 2010 was 19%. Nearly one out of every five dollars in revenue comes from Humira, which treats rheumatoid arthritis and other inflammatory diseases.
Abbott has until around 2016 when the first patent expires to find another growth driver for the company. Exactly when that happens depends on a few factors.
The Food and Drug Administration is currently working out a pathway for approval of copycats of biologics like Humira, so it's unknown if any generic-drug maker will be able to gain FDA approval by then.
If the approval process for biosimilars is established extremely quickly, however, Abbott could see patients switching from branded Humira to cheap versions of Johnson & Johnson's rival product Remicade, which will lose patent protection in the next few years. Abbott could also see branded competition from Pfizer, Rigel Pharmaceuticals
In sum
I think the good -- a solid history of growth and dividends -- outweighs the bad -- the inevitable collapse of Humira. The company is throwing off plenty of cash to help absorb the blow, and acquisitions and licensing of additional drugs should help deaden the blow further.
If you're looking for more dividend stocks in addition to Abbott, you can find links to the rest of the series at the end of this introductory article. And you can get another 13 high-yielding stocks you can buy today by picking up the Fool's report by the same name. Just click here to get your free copy.
