More than three years after deeming COVID-19 a global health emergency, the World Health Organization ended the pandemic's special status in May.
This was certainly welcome news for numerous industries that were hit hard by the pandemic, such as leisure and hospitality, food services, and retail. But for COVID-19 test makers like Abbott Laboratories (ABT 0.63%), a drop in test demand has weighed on the stock so far in 2023. Shares have shed 5% during that time as the broader markets have rallied.
However, Abbott is down but not out. Let's check out why the Dividend King with a 51-year dividend growth streak could be a savvy buy for income investors.
The base business is robust
Since its founding in 1888, with the goal of providing more effective therapies to patients and their physicians, Abbott has grown to epic proportions. The company's portfolio consists of top-selling nutrition products (e.g., Ensure shakes), popular diagnostic tests (e.g., BinaxNOW COVID-19 tests), leading continuous glucose monitors (e.g., the FreeStyle Libre franchise), and branded generic medicines. Thanks to this enviable product portfolio, Abbott's market capitalization is a whopping $180 billion.
The Chicago-based company recorded $10 billion in net sales for the second quarter ended June 30, down 11.4% over the year-ago period. As a shareholder, it's always tough to see a decline in the top line.
However, when viewed within the proper context, Abbott's results are, arguably, just fine; the company posted net sales growth in each of its four segments, except diagnostics. Net sales growth ranged from the mid-single-digits in its established pharmaceuticals and nutrition segments to double-digit growth in the medical devices segment.
Net sales in Abbott's diagnostics segment fell by 46% year over year to $2.3 billion during the second quarter due to tumbling demand for COVID-19 tests. Excluding COVID-19 test net sales and unfavorable foreign currency exchange from results, organic net sales for the company's base business grew by 11.5% in the quarter.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Net margin | 22.6% | 19% |
| Diluted shares outstanding (in millions) | 1,765 | 1,750 |
Data source: Abbott Laboratories.
Abbott's non-GAAP (adjusted) diluted earnings per share (EPS) decreased by 24.5% over the year-ago period to $1.08 for the second quarter. A slower decline in total operating expenses than net sales led to a 360-basis point contraction in the company's non-GAAP (non-generally accepted accounting principles) net margin during the quarter.
Retiring some of its shares via its share repurchase program only partially offset the impact of diminished profitability. This is why adjusted diluted EPS fell faster than net sales in the quarter.
The FreeStyle Libre continuous glucose monitor (CGM) is arguably the most promising product in the company's portfolio. The CGM franchise generated $1.3 billion in revenue for the company for the second quarter, which was up 22.9% over the year-ago period. As FreeStyle Libre continues to gain more market share through incremental product improvements and the global diabetes patient count further rises, the opportunity for much more revenue is there.
While COVID-19 tests are becoming less and less of Abbott's sales mix, there are plenty of additional product launches in the works, and so the company's outlook should improve. This is why analysts anticipate decent adjusted diluted EPS growth over the next few years.
Image source: Getty Images.
A phenomenal dividend growth rate
Meanwhile, against the S&P 500's 1.6% dividend yield, Abbott's 2% yield is high enough to attract the attention of dividend investors. In fact, Abbott has been a superb dividend grower. The company's quarterly dividend per share has skyrocketed in the past 10 years.
ABT Dividend data by YCharts.
And considering that Abbott's dividend payout ratio is poised to clock in at approximately 46% for 2023, the company looks set up to continue delivering respectable dividend growth. That's because such a payout ratio gives the company the funds to balance investing in growth, repaying debt, and repurchasing shares.
Abbott stock is an alluring value
Due to the sell-off in its shares, Abbott's forward price-to-earnings (P/E) ratio has dipped to just 22.5. This is below the medical devices industry average of 23.8. The company has a remarkable operational track record trading at a discount to its industry peers, making it a buy for dividend growth investors patient enough to wait for the turnaround to be completed.
