When it rains, it pours. After several weeks of relative quiet, dividend-paying healthcare businesses are reporting quarterly results left and right. Unfortunately, not everyone is telling stories that the stock market wants to hear.
Shares of Abbott Laboratories (ABT 0.52%) slipped more than 6% lower in response to the company's third-quarter earnings call on Wednesday, Oct. 19, 2022. The company reported earnings per share that beat analyst expectations by about 23%, but investors couldn't get over declining sales from more than one of Abbott's operating segments.
Is Abbott still a good dividend stock to buy, or will the challenges currently limiting growth be its undoing? Here's what you should know before you turn your back on this company and its legendary dividend program.
A mixed bag for medical devices
Medical devices are arguably Abbott's most important operating segment, so it was more than a little disturbing to see international device sales decline by 9% year over year and 7% compared to the previous quarter.
The company blamed intermittent lockdowns in China and supply constraints for soft device sales internationally. The important takeaway here is that both of these factors are temporary.
Supply constraints that have hampered international sales of cardiovascular devices haven't been a problem for the U.S. launch of Abbott's next-generation constant blood glucose monitor (CGM), the Freestyle Libre 3. Roughly one out of every 10 Americans has diabetes, and many are already on board with CGM. In the U.S., the FDA granted Abbott's new CGM clearance in May, and it's already in use by 4.5 million people worldwide.
Globally, second-quarter medical device sales grew 6.4% year over year. As supply chain constraints work themselves out, we could see this segment start growing at a double-digit percentage again.
Declining COVID-19 test revenue
Abbott Laboratories reported COVID-19 test revenue above its own expectation at around $1.7 billion during the second quarter. This is a decline from the previous year; investors can probably expect this figure to slide further in 2023.
Steadily declining demand for COVID tests will be a headwind, but it isn't anything the company can't overcome with soaring CGM sales. At the moment, COVID testing is responsible for just 16% of total revenue.
Never mind stumbling nutrition sales
Traditionally, nutrition sales have grown at a mid-single-digit percentage. The abrupt closures of a manufacturing facility that makes special baby formulas in February and then again in June caused third-quarter U.S. nutrition segment sales to tumble more than 25% year over year.
Closures and recalls regarding Abbott's nutrition business were embarrassing, but they highlight the company's dominant position in this niche. Abbott intends to maintain its position by investing $500 million into a second nutrition product manufacturing facility in the U.S. This should prevent a repeat of the national baby formula shortage that pressured nutrition sales this year.
How much passive income to expect
At recent prices, shares of Abbott offer investors a 1.9% yield that could rise significantly in the years ahead. Over the past year, the company used just 38% of its earnings to meet its dividend commitment.
A well-funded dividend program means shareholders can expect their quarterly payouts to rise roughly in line with the company's bottom line. At the midpoint of its guidance range, the company expects its bottom line to flatten out in 2022. That's impressive considering all the extra challenges facing Abbott this year.
Declining COVID revenue and supply chain constraints might make 2022 a flat year for earnings, but these challenges are temporary. The strength of its decades-old nutrition brands and its new device for the world's enormous population of diabetic patients will more than likely return Abbott's bottom line to double-digit year-over-year growth. Put it all together and it looks like Abbott is still a great dividend stock to buy now and hold for the long run.