With a 10-year return of 378% handily beating the market's gain of 282%, Abbott Laboratories (ABT 0.35%) is a stock that many investors dream about. Between its steadily rising dividend payout, a constant flow of new consumer health products, and the power of being one of the biggest healthcare companies in the world, it's easy to see why -- and all those pluses could make shareholders richer over time.
But can it continue to stay innovative and lucrative as an investment in the face of competitors encroaching and economic winds changing? Yes, probably, and here's why.
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This is an evergreen stock
Abbott's appeal to investors hasn't changed much over time, and it isn't likely to change anytime soon. Its business is broadly diversified, producing everything from coronavirus diagnostics to medical nutrition products, surgical tools, and medical devices for diabetes.
With more than $43 billion in trailing-12-month revenue, its portfolio of products is so numerous and well-purchased throughout the healthcare sector that it's hard to envision a future in which failures in any single market segment end up seriously endangering its share price. And it's a significantly safer stock than many of its healthcare peers as a result.
As shown below, the last 12 months have seen the company perform strongly, complete with a higher profit margin and significant earnings growth.
ABT Revenue (Quarterly) data by YCharts
Though quarterly revenue isn't expanding very quickly, that hasn't been a cause for concern because it's effectively the company's norm. After all, once a business has a market cap of more than $211.6 billion, it's hard to keep making more money at the same rate as when it was smaller.
Though management predicted total sales of COVID-19 diagnostics to be $4.5 billion for the year, Abbott reported $3.3 billion in revenue from the segment in the first quarter. So investors should expect sales to fall sharply in the next couple of quarters -- which is management's view. Yet, actual sales could top that estimate by the end of the year. For what it's worth, the low end of the company's guidance for its 2022 earnings is a diluted earnings per share (EPS) of at least $3.35, which is a bit lower than its trailing EPS of $3.94.
That means shareholders should buckle up for some potential headwinds and downward price movement. Given that this company is ripe for long-term holding as a result of its steady growth and dividend hikes over time, the risk of an earnings contraction isn't a reason to sell. Still, it's now undeniable that Abbott will need to look more aggressively beyond its coronavirus diagnostics for growth.
Finding new growth might get harder
As its fastest-growing product segment, diabetes care devices and consumables will likely be Abbott Labs' focus area for the next few quarters at a minimum. Sales of its latest continuous glucose monitor (CGM), the FreeStyle Libre, topped $1 billion for the first time in Q1, growing by 26.2% year over year on an organic basis.
Though there's no reason to believe that Abbott Labs is anywhere close to fully penetrating the market for CGMs, it does have a few competitors like DexCom that could contest its share under the right conditions. Therefore, it's highly likely that Abbott will soon be pioneering additional growth initiatives to shore up its top and bottom lines as coronavirus diagnostic revenue recedes.
Moving forward, investors can count on the company to keep posting robust growth in its free cash flow (FCF) and its dividend. See below:
ABT Free Cash Flow (Annual) data by YCharts
That's right -- over the last five years Abbott's dividend has grown by more than 77%. And with its free cash flow rising at an even faster pace, its ability to keep paying out the dividend is excellent. Management is particularly proud about its impeccable record of dividend hikes, which have occurred without fail once per year for the last five decades and counting.
Though there are some near-term headwinds regarding contracting diagnostic revenues to watch out for, Abbott's trajectory isn't very different from before. Its pitch to investors is that they'll get paid out gradually over many years, and in relative safety -- and in terms of the company's ability to fulfill that promise, things are much the same as ever.
