Even with the rally in the S&P 500 index over the past week, the index is still 20% lower than where it began the year. The state of the global economy, coupled with military conflict in Ukraine, has many stocks trading near their 52-week low.
Down 30% so far in 2022, diversified healthcare company Abbott Laboratories (ABT 0.05%) is one such example. At just 5% above its 52-week low of $93, is Abbott a buy for dividend growth investors? A look at its fundamentals and valuation will help show whether it could fit within a dividend-growth portfolio.
Abbott navigated near-term headwinds
Abbott's products are sold in over 160 countries and used by millions of people each day. They include heart pumps and its FreeStyle Libre diabetes care franchise, COVID-19 rapid tests, products like Similac infant formula and Ensure nutritional shakes, and generic medicines.
The company recorded $10.4 billion in revenue during its third quarter (ended Sept. 30), down 4.7% year over year. At first glance, a decline in revenue is something investors don't want to see. But this wasn't due to lower sales volume or weakened pricing power. The U.S. dollar remained robust versus the currencies of other countries where Abbott sales its products. Factoring this into the mix, the company's organic sales were actually up 1.3% over the year-ago period.
Abbott's sales grew in two out of its four segments. The medical devices business logged 6.4% organic sales growth year over year in the third quarter, while sales for its established pharmaceuticals segment surged 12%. The medical devices segment was buoyed by double-digit growth in the U.S. in its electrophysiology, structural heart, and diabetes care categories. And the established pharmaceuticals business, which focuses on off-patent medicines, was boosted by tremendous growth in India, China, and Brazil.
A slowdown in COVID-19 testing led to a 0.6% decline in the diagnostics segment's sales. Lastly, the nutrition segment's sales slipped 10.3%. This was the result of a halt in manufacturing some infant formula products in February at its factory in Sturgis, Michigan. Production wasn't resumed until part way through the third quarter.
Abbott produced $1.15 in adjusted diluted earnings per share (EPS) for the quarter, which was a 17.9% drop from the year-ago period. An increase in the company's cost of products sold during the quarter contributed to a nearly 350-basis-point decline year over year in adjusted net margin to 19.6%. Abbott's 1.4% decline in its shares outstanding to 1.8 billion wasn't able to offset the reduction in profitability in the quarter.
With the company devoting more than 6% of its net sales to research and development, analysts anticipate that Abbott will remain a major innovator. This is why they believe the company is positioned to generate 11% annual growth in adjusted diluted EPS growth through the next five years.
Image source: Getty Images.
A dividend with strong growth potential
Shares of Abbott currently have a dividend yield of 1.9%, which is a bit better than the S&P 500 index's 1.7% yield. And it doesn't appear to come at the cost of reduced potential for dividend growth.
That's because Abbott's dividend payout ratio currently stands at 36%. This allows the company to keep enough capital to fund expansion, debt repayment, and share buybacks. With this balanced payout ratio, I expect Abbott's dividend to grow nearly as fast as its earnings over the next several years.
The stock is fairly valued
Abbott's shares trade at a forward price-to-earnings ratio of 22.1, which is a tad below the medical devices industry's average of 22.8. Given Abbott's reputation and the fact that its earnings growth prospects are in line with the medical devices industry average of 12.2% a year, this is a rational price for long-term investors to pay.
Abbott is a top-notch business trading at a reasonable valuation -- giving investors a chance to buy and hold it for years to come.
