Is Abbott Labs the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Abbott Laboratories (NYSE: ABT  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Abbott.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.1% fail
  1-Year Revenue Growth > 12% 13.6% pass
Margins Gross Margin > 35% 57.6% pass
  Net Margin > 15% 13.9% fail
Balance Sheet Debt to Equity < 50% 92.8% fail
  Current Ratio > 1.3 1.36 pass
Opportunities Return on Equity > 15% 26.7% pass
Valuation Normalized P/E < 20 24.60 fail
Dividends Current Yield > 2% 3.5% pass
  5-Year Dividend Growth > 10% 9.7% fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Abbott Labs clocks in with a mid-range score of 5. That lackluster showing obscures the long-term stability of this stalwart pharma company, although it does point to uncertainty ahead.

Historically, Abbott has been a solid performer. As a member of the Dividend Aristocrats, Abbott has raised its dividend annually in 38 consecutive years. That compares favorably with Pfizer (NYSE: PFE  ) , which ended its 41-year streak when it slashed its dividend to buy Wyeth.

But despite its strong past, Abbott faces the same challenges that many of its competitors are struggling with. Just as Johnson & Johnson (NYSE: JNJ  ) has had to deal with product recalls, Abbott had to pull Similac baby formula from the shelves in September. As Vivus (Nasdaq: VVUS  ) and Arena Pharmaceuticals (Nasdaq: ARNA  ) suffered rejections from the FDA on their weight-loss drugs, so too did Abbott have to stop selling its drug in the weight-loss space, Meridia. And like Merck (NYSE: MRK  ) , Abbott faces an aging pipeline.

None of that means that Abbott won't rise to the challenge. It has the financial resources to make acquisitions to boost its pipeline. Investors have to understand, however, that Abbott isn't an autopilot investment, and in a changing industry, shareholders need to keep on their toes.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Abbott Labs to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value pick. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor recommendation. The Fool owns shares of Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1364872, ~/Articles/ArticleHandler.aspx, 8/29/2014 2:28:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement