Grace Groner spent 43 years as a secretary at healthcare conglomerate Abbott Laboratories (ABT 0.44%) before retiring and later passing away in 2010 at the age of 100. The fascinating part of her story was that she bought three $60 shares of the company's stock in 1935 (costing a bit over $1,200 in today's dollars) and held them until her death. After many decades of stock splits, dividends, and growth, her estate was worth more than $7 million at her passing.
Now, Abbott Labs is a much different company today than it was in 1935 or even 2010 -- but it still has a lot going for it. Here are three things smart investors know about Abbott.
1. Abbott is dividend royalty
Abbott's identity as a company has evolved over the years; it had an enormous pharmaceutical business until it spun off most of it as AbbVie in 2013. Today, the company focuses on nutrition, diagnostics, and medical devices with major shake-ups over the years, including more than $30 billion in acquisitions this past decade for St. Jude (medical devices) and Alere (diagnostics).
At the same time, management has continually given cash to shareholders, regardless of assets that come and go. Abbott Labs has paid and raised its dividend for the past 50 consecutive years, making it a Dividend King, an elusive club of just 39 companies from the S&P 500.
Currently, the dividend yield is a solid 1.6%, and management has raised it an average of 10% annually over the past five years. That's a good pace but one I hesitate to call spectacular. And there are larger yields out there. However, consistency wins the war; getting steady increases for decades played a significant role in Grace Groner's success at amassing her fortune.
Perhaps most incredible is that Abbott Labs only spends about 37% of its cash flow each year on the dividend, leaving plenty of room for many future increases for long-term investors.
2. Diabetes care is an ample opportunity for growth
Abbott is innovating in large niches within healthcare to find growth. Its glucose monitoring system, FreeStyle Libre, lets diabetes patients monitor their blood sugar by wearing a small patch that transmits data to a smartphone app. The patch lasts for 10 days, which seems much more convenient than pricking your finger for every test.
The product is rapidly growing, and it's become a significant contributor to the company's total revenue growth. Sales for "diabetes care" in Abbott's Medical Devices segment (FreeStyle Libre) grew 28% year over year in 2020, and that accelerated to 32% year-over-year growth in 2021, hitting $4.3 billion.
Momentum is increasing for the product, and the U.S. market alone for diabetes care devices could grow to $49 billion by 2030, averaging 6% growth per year. The company's ability to innovate and pivot to provide great products in high-growth niches within healthcare help explain the company's long-term success.
3. An acquisition could be on the way
I've mentioned the blockbuster deals to acquire St. Jude and Alere for about $30 billion; these are reminders that Abbott's management is not afraid to make a deal. The company's track record of integrating these new assets into its broader business is a good sign that future deals are likely.
Of course, you need deep pockets to cut a big deal, and Abbott's balance sheet looks better than it has in years. The deals for St. Jude and Alere put debt on the books. You can see in this chart how Abbott Labs had about $28 billion in total debt four years ago, four times its EBITDA (earnings before interest, taxes, depreciation, and amortization).
But today, total debt has fallen to $18 billion, and its debt-to-EBITDA ratio has fallen by more than half to 1.6. Meanwhile, Abbott's cash and short-term investments have swollen to more than $10 billion. With less debt and more cash on hand, that money has to go somewhere. Among other options, the company could repurchase shares. I won't speculate further, but it wouldn't surprise me to see Abbott jump on another big acquisition if the right deal comes along.