Has Abbott Labs Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Abbott Labs (NYSE: ABT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Labs.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

9.6%

Fail

 

1-Year Revenue Growth > 12%

2.5%

Fail

Margins

Gross Margin > 35%

62.4%

Pass

 

Net Margin > 15%

16.6%

Pass

Balance Sheet

Debt to Equity < 50%

73.6%

Fail

 

Current Ratio > 1.3

1.53

Pass

Opportunities

Return on Equity > 15%

26.5%

Pass

Valuation

Normalized P/E < 20

19.81

Pass

Dividends

Current Yield > 2%

3.2%

Pass

 

5-Year Dividend Growth > 10%

9.6%

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Abbott Labs last year, the company has given back one of the two points it earned from 2010 to 2011. Dividend growth slowed the tiniest bit, but the stock is still up more than 20% over the past year.

Abbott combines several health-care related businesses under one roof, including medical devices and pharmaceuticals. But unlike Johnson & Johnson (NYSE: JNJ  ) , which is similarly diversified, Abbott has decided to split itself into two publicly traded parts, with newly christened AbbVie to hold the pharmaceutical business while the continuing Abbott keeps its medical-device business.

Abbott has had some big news in recent weeks. The company said that a cocktail of hepatitis C drugs had an impressive 99% rate of wiping out the virus, including 93% of null responders who had failed previous treatments. The move puts pressure on Gilead Sciences (Nasdaq: GILD  ) , which will now need to demonstrate that its competing drug regimen will do as well.

Still, Abbott has had its share of setbacks. For instance, Pfizer (NYSE: PFE  ) recently got its tofacitinib drug for rheumatoid arthritis approved by the Food and Drug Administration, and the drug, now called Xeljanz, will compete against Abbott's blockbuster Humira, which is approaching the 10-figure sales mark. In addition, Abbott had to discontinue phase 3 trials of its blockbuster-potential kidney disease and type 2 diabetes drug.

To compete better, Abbott has made partnerships to try to bolster its pipeline. A deal with Seattle Genetics (Nasdaq: SGEN  ) to license antibody-related technology has led to a number of promising product leads.

Where the two halves of Abbott will go after the AbbVie spinoff remains to be seen. With a steep patent cliff, though, AbbVie faces the greater challenge, but arguably has greater potential as well.

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.

While you can certainly make huge gains in pharmaceuticals and medical devices, the best investing approach is simply to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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


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