Consistently meeting or beating analysts' revenue and earnings expectations is the sign of a quality stock. It demonstrates that its products and/or services have strong demand, which is indicative of a company with competitive advantages.
Diversified healthcare stock Abbott Laboratories (ABT -0.11%) has a track record of matching or exceeding analysts' revenue and earnings forecasts. But is the stock a buy for dividend growth investors? Let's dig into Abbott's fundamentals and valuation to address the question.
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The business is thriving
When it reported fourth-quarter earnings results for the period ended Dec. 31, Abbott Laboratories topped analysts' revenue consensus for the eighth quarter out of the past 10. Revenue totaled $11.47 billion, which represented 7.2% growth over the year-ago period. This managed to comfortably surpass analysts' average estimate of $10.71 billion.
All four of Abbott's reportable segments -- diagnostics, medical devices, nutrition, and established pharmaceuticals -- were able to produce sales growth ranging from the low single digits to the mid-teens in the fourth quarter. Most significant was medical devices. Despite only accounting for about one-third (32.7%) of Abbott's fourth-quarter revenue, the medical devices segment was responsible for nearly two-thirds (64.1%) of the company's overall sales growth.
The medical devices segment was able to grow its revenue 15.1% year over year to $3.75 billion for two reasons. For one, there were two U.S. Food and Drug Administration approvals earlier in the year. One was a medical device for atrial fibrillation patients at risk of stroke and the other was for patients with symptomatic, severe aortic stenosis who are at high risk for open-heart surgery. The other reason that contributed to the tremendous growth of the medical devices segment was the continued recovery from the COVID-19 pandemic's impact on elective procedures, which is how the segment generates its revenue and earnings.
Abbott Laboratories' higher-than-expected revenue base led to $1.32 in non-GAAP (adjusted) diluted earnings per share (EPS) in the fourth quarter, which was a 9% drop over the year-ago period. This easily bested the analysts' consensus of $1.21 for the quarter.
A $491 million uptick in selling, general, and administrative expenses due to supply-chain inflation was behind the 380-basis point drop in net margin to 20.6% during the fourth quarter. But as Abbott Laboratories passes these costs on to consumers (specifically in the consumer-facing nutrition business) and inflation begins to decelerate later this year, this should be less of an issue for the company.
With Abbott expecting to slightly up its research and development investment to $2.7 billion this year, the company's reputation of steady product launches should continue. Along with major tailwinds like an aging global population, this is expected to result in 13.2% annual earnings growth over the next five years.
A reliable dividend grower
Abbott Laboratories looks positioned to continue growing in the years ahead. But can it build on its newly minted status as a Dividend King? The answer is yes, based on an estimate of what its dividend payout ratio will be this year.
Abbott expects at least $4.70 in adjusted diluted EPS this year against a dividend per share obligation of $1.88, which works out to a payout ratio of 40%. This should leave the company with adequate capital to repay debt, execute share repurchases, and finance bolt-on acquisitions.
Abbott Laboratories provides a safe, market-beating 1.6% dividend yield for investors. And based on the company's potential, the dividend should grow in the high single digits annually for the foreseeable future.
The company is financially sound
Abbott Laboratories' strong financial condition is another reason to like the stock.
Its interest coverage ratio improved significantly from 10.9 in 2020 ($5.47 billion in earnings before interest and taxes/$500 million in interest expenses) to 17.8 in 2021 ($8.70 billion in EBIT/$490 million in interest costs). Given the quality of Abbott's finances and the degree to which it's currently able to cover its interest expenses, the company will almost certainly be in business for many years to come.
Abbott's stock is sensibly valued
Abbott Laboratories seems like a fundamentally healthy business, which leads us back to the original question: Is the stock a buy?
It appears to be a buy for dividend growth investors at this time. The stock trades at a forward price-to-earnings ratio of 23.4, which is a bit below the medical devices industry average of 25.3. Since the stock's 13.2% annual earnings growth prospects are just below the industry average of 15.2%, it looks to be fairly priced.
