If you're interested in buying a stock that's safe enough to recommend for your grandma or your grandchildren alike, Abbott Laboratories (ABT 0.30%) has a lot to offer. The healthcare juggernaut is capably led, fully diversified, and constantly expanding -- and it has proven quite profitable to hold over long periods.
Nonetheless, one person's favorite stable stock is another person's market-underperforming clunker. Let's take a look at the company's benefits and drawbacks as an investment so that you can judge whether or not it's a good buy for you.
Steady, long-term growth for patient investors
Abbott Labs has a handful of factors that make it a strong anchor for retirement savings and other long-term investing purposes. The single most critical factor is that the business has a very long history of successfully developing new products to chase new growth opportunities like coronavirus diagnostic testing, while also retaining its substantial base of revenue derived from sales of relatively evergreen products like baby formula and disposable surgical tools. In 2021, these products provided more than $43 billion in revenue.
For those wondering, the company has been operating in some form or another for more than 130 years, which attests to its enduring ability to compete. Most recently, its medical device division has been pioneering in-demand products like continuous glucose monitors for diabetes management. It's also developing even more sophisticated things like deep brain stimulation hardware for severe depression.
Consistent innovation like that has a cost, though. Its trailing 12-month research and development (R&D) expenses topped $2.8 billion, which works out to around 6.2% of its revenue. But over the past five years, its proportion of R&D expenses to revenue has fallen, and net income has risen by 307% to reach more than $8.5 billion. So it's clear that R&D expenses are quite sustainable. That's another point in its favor for long-term investors, as it demonstrates that Abbott can secure tons of earnings growth even if it doesn't divert any additional slices of its revenue pie to developing new products.
And that's also part of the reason why it can afford to treat its shareholders with a metronome-like beat of stock buybacks and dividend payments for years on end. In fact, it's a Dividend King, which is a distinction it earned by increasing its dividend payout every year for the last half century. Investors can probably count on the company to keep raising its dividend and maintain that record.
So if you're willing to hold its shares for the next 50 years, you'll likely see your dividend income grow by many times over. Such growth is unlikely to make your total return from Abbott Labs approach that of a bona fide growth stock, but the point is that it won't require you to take on growth stock levels of risk to get a solid gain.
Don't expect riches to come quickly
As great as Abbott's product mix and dividend policies are, it isn't about to consistently outperform the market. With a market cap in excess of $191 billion, it's one of the world's largest businesses. It's incredibly hard to post rapid revenue growth at that size even with a constant supply of new products, at least for companies outside the software industry.
Furthermore, it has plenty of competition in most of its segments, so there isn't much hope for any instances of trouble-free market penetration. Medical device manufacturers like DexCom are staunch competition for Abbott's glucose monitors, and they're also likely to expand more rapidly in that market thanks to their smaller size and tighter focus.
So if you're looking for a conservative stock that'll appreciate in value steadily over time without too many bumps in the road, Abbott Labs could be a profitable addition to your portfolio. On the other hand, it it may not be the right pick for people wishing to take on higher levels of risk for larger returns, and it also may not be a good option for those who dislike paying taxes on their dividend income.