The S&P 500 is down 8% in 2022 and many quality investments have gone down along with it. Healthcare company Abbott Laboratories (ABT 1.46%) is one of those casualties, declining by a surprising 12%. It's a noteworthy development given that its business is versatile and generally pretty solid all around.
However, it has also benefited from COVID-19 testing. And now with concerns around the pandemic starting to subside and testing becoming less of a worry, investors may be preparing for some weaker results ahead when the company posts earnings later this month.
To me, it looks like a bit of an overreaction, and for dividend investors, now could be an excellent time to invest in the business.
Image source: Getty Images.
Should investors be worried about a drop in COVID-19 testing?
When Abbott Laboratories last reported its earnings in January, it was already anticipating a drop in testing for COVID-19. The company said that during the last three months of 2021, revenue related to its COVID-19 tests totaled $2.3 billion and $7.7 billion for the full year -- that's 18% of the $43.1 billion in total revenue that Abbott reported last year. The company has four main segments, including diagnostics (which is where its COVID-19 testing falls), medical devices, nutrition, and pharmaceuticals.
The company's guidance for all of 2022 forecasts just $2.5 billion from COVID-19 testing, with the company expecting to generate the bulk of that during the early part of the year. And this year, Abbott projects that its diluted per-share profit will be $3.43 or greater. That's 13% less than the $3.94 profit it posted last year.
Although it's a decline in earnings, there are three reasons income investors shouldn't worry about it. The first is that Abbott's dividend totals just $1.88 annually and even at that reduced profit, the payout is still not in any danger.
Secondly, with Abbott already providing that guidance, the share price already reflects that forecast. Unless Abbott grossly underestimated its COVID-19 revenue for the quarter, it's unlikely that there will be another steep drop in price after it reports earnings this month. The bar is already set low, and investors likely aren't expecting a resurgence in COVID-19 testing at this point.
And lastly, even with the drop in earnings, the forecast earnings per share (EPS) will still be 38% higher than the $2.49-per-share profit Abbott reported in 2020. And in 2019, EPS was even lower at just $2.06. Abbott is in a stronger position than where it was a few years ago, and that's the key takeaway for investors.
A declining share price can be an opportunity
If a company is fundamentally sound, as Abbott is, then investors shouldn't worry about a temporary drop in price. As the following chart illustrates, a decline in share price means you're collecting the same dividend for less of an investment, and thus, you are earning a higher yield:
At just under 1.6%, Abbott is now paying investors more than the S&P 500 average of around 1.4%. Plus, as a Dividend King, the company is in an exclusive club of dividend stocks that are among the safest in the world.
Even if you aren't thrilled with the current payout, just hang on to the stock. This year, the company increased its dividend payments by 4% to $0.47. And last year, after a strong performance due to the pandemic, it increased its payouts by 25%.
A no-brainer buy?
Abbott is a top healthcare stock to own for the long haul. There's little reason to worry that the company will suddenly turn unprofitable or that it won't keep increasing its dividend. The only argument I could make against owning Abbott would be that nearly 30 times earnings is a steep multiple to pay for the stock, especially since the average stock in the Health Care Select Sector SPDR Fund trades at only 23 times its profits.
There may still be a decline in the share price given that Abbott is facing some headwinds right now due to COVID-19 testing. And for that reason, it may be tempting to wait to see if there's more of a decline as the markets do appear to be shedding some excessive valuations of late.
However, the stock may not fall a whole lot further and it could even rise as hospitals resume their normal day-to-day operations, which COVID-19 previously interrupted. Investors looking for a solid dividend stock shouldn't hesitate to buy shares of Abbott Laboratories.
