In favorable economic environments, even mediocre companies manage to grow their dividends. But when the going gets tough, it might be time to focus on Dividend Kings. These are the most proven dividend-paying stocks, having demonstrated the ability to increase their payouts for at least 50 years. Half a century is such a long period of time that it practically guarantees that a company has increased its dividend through at least several recessions.
With 50 consecutive years of dividend growth, the healthcare giant Abbott Laboratories (NYSE:ABT) is a dividend king. Is this a buy for income investors right now? Let’s look at its fundamentals and valuation to get an answer.
A proven track record in defying analyst expectations
At the end of July, Abbott Laboratories shared its financial results for the second quarter ended June 30. The healthcare company once again exceeded average analyst expectations.
Abbott posted sales of $11.3 billion in the second quarter, up 10.1% from a year ago. That far exceeded analyst consensus for sales of $10.4 billion for the quarter. And this is the ninth quarter of the last 10 quarters that the company has done so.
As was also the case in the prior quarter, Abbott’s nutrition segment was the only segment not to report year-over-year sales growth. Segment sales fell 7.4% year-over-year to $2 billion in the second quarter. Indeed, the company issued a voluntary recall and halted manufacturing of some of its infant products at a US factory in February. The good news for the segment is that its plant restarted production in July, so results should pick up.
Abbott’s tremendous sales growth in the second quarter was again driven by strong demand for its rapid COVID-19 tests in the diagnostics segment. This propelled segment revenue up 33.1% from the prior year period to $4.3 billion for the quarter. Despite COVID-19 surges in markets around the world and lockdowns in China, the company’s medical device segment sales edged up 2.5% to $3.8 billion in the second quarter. And the established pharmaceutical segment was able to increase sales 3.7% year-over-year to $1.2 billion in the quarter.
Meanwhile, non-GAAP diluted earnings per share (EPS) (adjusted) climbed 22.2% from the period a year ago to $1.43 in the second quarter. This was significantly higher than the $1.09 analysts had expected for the quarter. How has the company managed to exceed expectations for 10 consecutive quarters?
In addition to Abbott’s higher sales base, the company’s non-GAAP net margin increased 190 basis points year over year in the second quarter. Along with a 1.6% drop in its diluted number of shares outstanding to 1.8 billion, this explains how earnings growth far exceeded sales growth for the quarter.
As COVID gradually wanes over time, this will likely be a headwind for Abbott’s sales and earnings. But analysts expect the company’s innovation to drive annual earnings growth of 11% over the next five years.
The dividend should continue to advance
Abbott is posting a dividend yield of 1.7%, which is slightly higher than the S&P500 return of 1.5% of the index. And the robust dividend growth should persist in the years to come for the Dividend King.
Indeed, the company’s dividend payout ratio will be around 37% in 2022, allowing it to retain the capital needed for share buybacks, deleveraging and acquisitions. As a result, I believe high single-digit annual dividend growth will occur over the medium term.
A world-class company at a reasonable valuation
Abbott Laboratories is arguably among the best companies on the planet. And the valuation of the action does not fully reflect this reality.
This is demonstrated by Abbott’s forward price/earnings (P/E) ratio of 23.6. For context, that’s just below the medical device industry average P/E ratio of 24.8. That’s why I’m convinced that income- and value-oriented investors should buy these dividend growth stocks for their portfolios.
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Kody Kester holds positions at Abbott Laboratories. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.