When it comes to underrated healthcare stocks that smart investors love, Abbott Laboratories (ABT -0.65%) takes the cake. While it might not seem as exciting as its similarly-sized peers in pharma or medical robotics, this stock has vast staying power that's unlike most other companies in the market.
But many investors may misunderstand the point of owning Abbott shares since many of its markets are decidedly niche. After all, selling goods like cardiac stents and Pedialyte might be profitable, but those products certainly don't seem like they'll ever face a gold rush of fresh demand. On the contrary, it's exactly Abbott's willingness to compete in these spaces that makes the company one of the sturdiest.
So let's examine some key ways Abbott might stand out in the eyes of an experienced investor.
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1. Slow and steady can be quite attractive
Given that Abbott has a market cap of about $238 billion and trailing revenue of $42.3 billion, it shouldn't surprise anyone that the business sometimes struggles to grow as aggressively as a smaller competitor might. Simply put, for companies that sell physical products like Abbott does, it's easier to go from $1 billion to $2 billion in revenue than it is to go from $40 billion to $80 billion. And that's just fine, because the appeal of this stock isn't the same as a fast-paced growth stock in software or an emerging industry.
Instead, smart investors know that Abbott Labs is a safe, highly diversified, and relatively conservative investment. It might not always beat the market (though it did over the past three years). More importantly, you can pretty much bet the farm that this stock isn't going to go to zero overnight -- even if the market crashes and the economy is melting down.
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Whereas smaller healthcare businesses might compete in one product category, Abbott competes in a myriad of different areas, which is a key pillar of its resilience. It doesn't need to grow its medical nutrition business by double digits every year as long as there's also growth in, say, its surgical tools or glucose monitor segments.
With such a broad base of revenue, it's harder for a setback in any given area to put a dent in earnings. For investors seeking a stable stock to anchor their portfolio, such diversification is worth more than the prospect of rapid growth.
2. Coronavirus test revenue won't stay static
Since the start of the pandemic, Abbott Labs has raked in billions of dollars in sales of its coronavirus diagnostic tests. In particular, its BinaxNOW rapid antigen test kits have a leading market share in the rapid testing market.
The company made $1.9 billion from its coronavirus diagnostic products in the third quarter of 2021, meaning that the tests made up a significant proportion of its $10.9 billion in global sales for the three-month period. But with the emergence of the omicron variant, testing revenue could skyrocket. Given that many pharmacies and retailers are barely able to keep the tests in stock as a result of wild demand, it's likely that this quarter will be a strong one for sales.
On the other hand, if the variant disappears quickly and the pandemic ebbs, test-kit sales could tank. Even though Abbott's business is highly diversified within healthcare, decreasing sales of rapid tests might put a serious dent in its revenue growth. Either way, sales of these kits are unlikely to stay the same, and that's something new investors might want to track.
3. The dividend isn't going anywhere but up
Abbott's shares currently pay a dividend yield of 1.47%. That's hardly an impressive amount until you take into account that the company has raised its dividend every year without fail for 50 years in a row. And at the end of 2022, it'll likely raise the dividend once again -- thus, maintaining its membership in the elite Dividend Kings club.
Financing these endless dividend hikes is a breeze for a company like Abbott. Over the past five years, its quarterly free cash flow has grown by 641%. So as long as the company's operations continue to be profitable and growing at a sustainable rate, investors should expect a larger and larger payment over time.
