The past year hasn't been the best for Abbott Laboratories (ABT 0.10%) and its shareholders, as the medical devices giant has lagged the broader market. But zooming out helps give some perspective: The company has soundly outperformed the broader market over the last five, 10, and 20 years.
There are excellent reasons to think Abbott will produce more market-beating returns in the years to come for investors willing to be patient. Here are just two reasons the future is bright for this medical devices company.
ABT data by YCharts.
1. Diversification is key
A diversified business makes a company less reliant on a single segment, which can help during tough times. Even if one of its units faces headwinds, it can rely on other segments to pick up the slack. Abbott is an excellent example.
The company operates four segments: nutrition, diagnostics, established pharmaceuticals (in which it sells generic pharmaceuticals in emerging markets), and medical devices. The company's sales for 2021 were divided among these four business units as follows:
|
Segment |
2021 Sales |
YOY Growth (Organic) |
Percentage of Total Sales |
|---|---|---|---|
|
Nutrition |
$8.29 billion |
7.7% |
19.3% |
|
Diagnostics |
$15.64 billion |
42.7% |
36.3% |
|
Established pharmaceuticals |
$4.72 billion |
10.4% |
11% |
|
Medical devices |
$14.37 billion |
19.4% |
33.4% |
Data source: Abbott. Chart by author. YOY = year over year.
Abbott's diversity has been crucial in maintaining its revenue and earnings in the past couple of years. The medical devices business suffered as elective surgery decreased during the pandemic, leading to lower sales for some products in this segment.
However, Abbott developed and marketed several COVID-19 diagnostic tests, the sales of which substantially contributed to its top and bottom lines. Without its diagnostics business, the company would have had much worse financial performance in the past two years.
But in addition to its range of business segments, Abbott benefits from geographical diversity with a presence in more than 160 countries. Many of those countries are emerging markets where spending on healthcare products is outpacing the growth of the gross domestic product.
Investors shouldn't overlook the importance of these diverse business operations.
Image source: Getty Images.
2. Major tailwinds
The healthcare industry is on what looks like an unstoppable upward trend. While there will always be a relatively high demand for various health-related products, the world's aging population will only increase this demand in the coming decades. According to some estimates, those 65 and older will represent nearly 25% of the U.S. population by 2060, up from 16% in 2019.
The role that well-established healthcare innovators like Abbott play will only become more prevalent since people need more care as they get older. Besides global aging trends, there is one specific growth area the company is looking to tap into: the market for continuous glucose monitoring (CGM) systems.
CGM devices help diabetes patients automatically track their blood glucose levels and achieve better health outcomes. Abbott's CGM device, the FreeStyle Libre, has been immensely successful. In the fourth quarter, sales of this product came in at $1 billion, 36% higher than the year-ago period.
During the 2021 fiscal year, the number of FreeStyle Libre's users increased by more than 35% and exceeded 4 million. The number of diabetes patients will grow considerably in the coming years, and while that's not great news, it also means there will be more of a need for devices like the FreeStyle Libre.
As one of the market leaders in CGM with a long history of innovation, expect Abbott to be at the forefront of this space for many years to come.
Think long term
There are other reasons to consider purchasing shares of Abbott. The company's product portfolio has scores of patents that help keep competitors at bay, and it has a well-established reputation and deep connections in the industry.
Last but not least, it is a Dividend King, which makes it an excellent option for income-seeking investors. At its current share price, the stock yields 1.53%, slightly better than what the S&P 500 offers. These factors -- added to Abbott's diversified business and long-term growth prospects -- make the company an outstanding stock to consider buying and holding on to for a long time.
