Dividend stocks tend to outperform other asset classes during economically challenging times. The simple reason is that companies with mature businesses, and hence stable free cash flows, are typically less sensitive to economic headwinds.
The dividend powerhouses Abbott Laboratories (ABT -1.16%) and Medtronic (MDT -0.43%) apparently didn't get this memo, however. Despite both companies raising their dividends for over four straight decades, Abbott and Medtronic's shares actually sank faster than the broader markets over the course of 2022.
Which of these beaten-down dividend stocks is the better buy right now? Let's dig deeper to find out.
The case for Abbott Laboratories
Abbott's stock price has struggled of late for four reasons:
- An investigation into its infant formula business isn't sitting well with shareholders.
- Declining COVID-19 product sales weighed heavily on its 2022 fourth-quarter financial results.
- Apple's rumored development of a noninvasive glucose monitoring device (CGM) is a potential competitive threat to the company's Libre CGM franchise. Libre sales currently account for approximately 10% of Abbott's consolidated revenue.
- Abbott's stock has long held a premium valuation -- relative to Wall Street's fair value estimate -- due to its stable revenue stream, 51-year streak of raising its dividend, and highly diversified product portfolio.
On the plus side of the ledger, Abbott is expected to return to top-line growth next year. Wall Street bulls think that newer medical devices like the transcatheter aortic valve implantation system Navitor and the chronic pain device Eterna can power the company past most, if not all, of these headwinds.
Dividend-wise, Abbott pays out an annualized yield of 2% at current levels, which is slightly higher than the average dividend-paying stock in the benchmark S&P 500 index. Its dividend also appears sustainable for the long haul based on the company's below-average payout ratio of 48%.
The case for Medtronic
Medtronic's stock took a step backward in 2022 due to supply chain issues, hospital staffing challenges, and a sharp uptick in patients delaying medical procedures due to the pandemic, among other headwinds beyond the company's control.
With most of these difficulties starting to ease, Wall Street analysts think the company's financial results ought to normalize over the balance of the current year. What's more, the medical device giant's bulls are optimistic that new product launches in cardiovascular care and diabetes could return it to mid-single-digit top-line growth in 2024.
On the dividend front, Medtronic has proven its dedication to rewarding loyal shareholders through its 45-year streak of consecutive payout increases. At current levels, the company also offers an above-average yield of 3.26%.
Medtronic's relatively high dividend yield is especially attractive in light of its bargain-basement valuation. While the average large-cap medical device company trades at over 45 times trailing earnings, Medtronic's stock is presently being valued at a far more modest price-to-earnings ratio of 27.9.
Now, Medtronic's payout ratio is on the high side at 87.8%. And while its return to top-line growth next year should improve this key metric, this elevated payout ratio does imply that future dividend increases might be modest in nature.
Verdict
Although Abbott and Medtronic both have fundamentally sound businesses, Medtronic is arguably the better dividend stock to buy right now. The medical device titan sports a substantially higher yield, and it comes with fewer question marks from a near-term growth standpoint.
Medtronic's rich history of annual dividend increases should also comfort any investors concerned about a possible payout reduction. The company's payout ratio, after all, should normalize as the medical procedure space ramps up post-COVID.
