If you're trying to build a passive income stream to eventually fuel your dream retirement, Abbott Laboratories (ABT 0.63%) is a stock you probably want to know more about. This legendary dividend payer has raised its payouts by 264% over the last 10 years, and it has a little something for everyone.
In addition to its recent rapid dividend growth, cautious long-term investors love the stock because they know Abbott has raised its dividend payout for 50 consecutive years.
Growth-conscious investors appreciate Abbott's commitment to innovation, which has helped make it one of the world's leading providers of next-generation medical devices and diagnostics. However, sales of its COVID-19 diagnostic tests have fallen sharply, and they don't seem likely to recover.
Shares of Abbott have tumbled more than 10% from a high point they reached in July. Is it a good stock to buy on the dip?
Reasons to buy Abbott Laboratories stock right now
COVID-19 test sales are tanking as expected, but sales of its other diagnostics, nutrition products, and medical devices are soaring. Second-quarter sales excluding COVID-19 diagnostics surged 11.5% year over year.
Investors are particularly excited about rising sales of Abbott's FreeStyle Libre 3 continuous blood glucose monitor (CGM), which earned FDA clearance last May. The sensor for the new device is the size of two stacked pennies. Its biggest competitor, the G7 from Dexcom (DXCM -9.90%), didn't launch in the U.S. until this February, and its wearable sensor is significantly larger than that of the FreeStyle Libre 3.
A first-mover advantage combined with the appeal of a physically smaller device pushed FreeStyle Libre sales 24.7% higher year over year to $1.3 billion in the second quarter (on a constant-currency basis). This is a big figure that could get much larger. An estimated 11.3% of the U.S. population has diabetes, and the disease's prevalence is rising around the world.
Abbott's medical device segment could get a big boost from its new leadless pacemaker, which the FDA approved in July. Named Aveir, it's the world's first dual-chamber leadless pacemaker. Roughly four-fifths of people who need pacemakers require pacing in two chambers of the heart.
Image source: Getty Images.
Reasons to remain cautious
After 50 consecutive annual dividend hikes, plenty of investors have realized that Abbott has a good thing going. Its shares have been trading for 35.1 times trailing earnings, which implies some rapid growth ahead.
Soaring FreeStyle Libre sales weren't enough to compensate for COVID-19 diagnostic sales falling off a cliff this year. As a result, operating earnings in the first half of 2023 were down 42.3% year over year.
If Abbott can't turn its ship around and begin reporting earnings growth in the quarters ahead, investors who buy at recent prices could experience heavy losses in the near term.
Worth the risk for most
If you're near retirement, Abbott Laboratories probably isn't the right stock for you to buy now. If you have time to let its dividend grow before you will need to begin drawing on the income it provides, though, it's well worth the risk.
Despite its collapse in earnings over the past 12 months, Abbott is still strongly profitable. The company needed just 62.5% of its free cash flow from operations to cover its dividend. This means it can raise its payout more or less in line with earnings growth in the years ahead.
Second-quarter COVID-19 diagnostic revenue collapsed to $263 million from $2.2 billion a year ago. However, now that COVID-19 diagnostic revenue has nearly reached its floor, sales of Aveir pacemakers and Freestyle Libre CGMs can push Abbott Labs' earnings much higher in 2024 and beyond.
