Please ensure Javascript is enabled for purposes of website accessibility

Why Abbott Laboratories Just Became an Even Better Buy

By David Jagielski – Feb 3, 2020 at 8:51AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The healthcare stock has produced returns of more than 90% in five years and it's still going strong.

Abbott Laboratories (ABT) has been a great buy for many years. The healthcare stock has made investors rich in a number of ways. While it may pay a modest dividend, the annual increases to its payouts for more than 40 years has made it an exceptionally good long-term buy.

The returns shareholders have earned over the years from simply holding its shares have been very strong. In 2019, Abbott's stock was up 20%, a little better than the 18% returns investors would have earned by holding the Health Care Select Sector SPDR Fund.

As good of a buy as Abbott has been, it just got even better.

The company showed strong sales growth in 2019

Abbott released its fourth-quarter earnings on Jan. 22, and the numbers were very strong. Revenue of $8.31 billion was up 7.1% in Q4, which was good enough to beat analyst expectations of $8.26 billion. Meanwhile, diluted earnings per share (EPS) of $0.95 were in line with Wall Street's expectations as well.

The company's overall performance was even stronger when looking at its organic growth rate, which factors out the effect of foreign exchange as well as non-core business in the nutrition segment that Abbott discontinued in 2018. Organic growth in Q4 was 8.5% and two segments were up by double-digits: Medical devices rose by 11.3% and pharmaceuticals grew by 10%. Medical device sales were also up 10.5% for the entire year when looking at its organic numbers.

People in a meeting reviewing numbers.

Image source: Getty Images.

Abbott's bottom line was even more impressive

Revenue was strong, but what really stood out was the jump in earnings. The company's net earnings of $1.05 billion were up 61% from the prior-year quarter when Abbott earned $654 million. Small wins along the way, such as fewer expenses related to interest and debt, saved the company $36 million, while the net effect of foreign exchange added $2 million to its bottom line compared to a loss of $26 million a year ago. That's $62 million in cost reductions; that alone would have been good enough for a 10% improvement from last year's bottom line.

However, the biggest gains were in the company's operating income where Abbott was able to squeeze out more from its top line. Operating expenses, including cost of goods sold, rose at a rate of 4.9%, slightly below the 7.1% increase that the company saw in its top line. That helped Abbott's operating income rise by $224 million.

It was the same story when looking at the company's full-year results, as Abbott's revenue growth of 4.3% was well above the 1.7% increase that its operating expenses rose by, leaving more of the top line to trickle through to the bottom. As a result, full-year earnings were also up an impressive 56% year over year.

It's expecting another good year in 2020

With a stellar 2019 on the books, Abbott is expecting another strong showing this year. In its full-year guidance for 2020, the company is projecting that organic growth will again fall between 7% to 8%. In 2019, organic growth for the year came in at 7.7%.

On the earnings side, the company is expecting diluted EPS of between $2.35 and $2.45. That would be another double-digit improvement from the company's diluted EPS of $2.06 in 2019. 

It's hard not to like Abbott 

At a forward price-to-earnings ratio of 22 and a price-to-book multiple of around five, Abbott is not a cheap stock for value investors. However, given the growth the company has demonstrated and its numbers being weighed down by foreign exchange, there's reason to be optimstic that it can build on these results not just for one year but many years down the road.

It's a sign of good management that a company can grow sales and at the same time bring its costs down. But given that the company has been able to increase its dividend payments for decades, it may not be all that surprising that Abbott is such a quality stock to invest in. With good revenue diversification and multiple segments showing strong sales growth, the healthcare stock is a good option for risk-averse investors who may be concerned that a recession is around the corner and are in search of a quality dividend.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Abbott Laboratories Stock Quote
Abbott Laboratories
ABT
Health Care SPDR Stock Quote
Health Care SPDR
XLV

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.