In favorable economic environments, even mediocre companies are able to grow their dividends. But when the going gets tough, it may be time to focus on Dividend Kings. These are the most proven dividend-paying stocks because they have demonstrated an ability to raise their payouts for at least 50 years. A half a century is such a long period of time that it virtually guarantees a company has raised its dividend through at least several recessions.
With 50 consecutive years of dividend growth, healthcare giant Abbott Laboratories (ABT -0.63%) is a Dividend King. Is it a buy for income investors right now? Let's dig into its fundamentals and valuation to get an answer.
A proven track record of defying analysts' expectations
In late July, Abbott Laboratories shared its financial results for the second quarter ended June 30. The healthcare company once again topped average analysts' expectations.
Abbott reported $11.3 billion in sales during the second quarter, which was 10.1% higher than the year-ago period. This handily surpassed the analyst sales consensus of $10.4 billion for the quarter. And it was the ninth quarter out of the last 10 quarters that the company has done so.
As was also the case in the previous quarter, Abbott's nutrition segment was the only segment to not log year-over-year sales growth. Sales for the segment declined 7.4% year over year to $2 billion in the second quarter. That's because the company issued a voluntary recall and manufacturing shutdown on some of its baby formula products at a U.S. plant back in February. The good news for the segment is that its plant started production back up in July, so results should recover.
Abbott's tremendous sales growth in the second quarter was again driven by strong demand for its COVID-19 rapid tests in the diagnostics segment. This powered the segment's revenue 33.1% higher over the year-ago period to $4.3 billion for the quarter. Despite COVID-19 surges in markets around the world and lockdowns in China, the company's medical devices segment sales edged 2.5% higher to $3.8 billion during the second quarter. And the established pharmaceuticals segment was able to increase its sales by 3.7% year over year to $1.2 billion in the quarter.
Meanwhile, non-GAAP (adjusted) diluted earnings per share (EPS) soared 22.2% higher over the year-ago period to $1.43 during the second quarter. This was significantly more than the $1.09 that analysts were expecting for the quarter. How did the company manage to beat expectations for 10 quarters in a row?
Aside from Abbott's higher sales base, the company's non-GAAP net margin increased by 190 basis points year over year in the second quarter. Along with a 1.6% decline in its diluted outstanding share count to 1.8 billion, this explains how earnings growth far outpaced sales growth for the quarter.
As COVID gradually wanes over time, this will likely be a headwind to Abbott's sales and profits. But analysts expect that the company's innovation will lead to 11% annual earnings growth over the next five years.
The dividend should keep chugging along
Abbott boasts a 1.7% dividend yield, which is slightly above the S&P 500 index's 1.5% yield. And robust dividend growth should persist in the years ahead for the Dividend King.
This is because the company's dividend payout ratio will be around 37% in 2022, which allows it to retain the capital necessary for share repurchases, debt reduction, and acquisitions. As a result, I believe high-single-digit annual dividend growth will occur over the medium term.
A world-class company at a sensible valuation
Abbott Laboratories is arguably among the best businesses on the planet. And the stock's valuation doesn't fully reflect this reality.
This is evidenced by Abbott's forward price-to-earnings (P/E) ratio of 23.6. For context, this is just below the medical devices industry average forward P/E ratio of 24.8. That's why I'm convinced that income and value investors should buy this dividend growth stock for their portfolios.