Why I believe Abbott is much better positioned in today’s rising inflation scenario (ABT)

introduction

Inflation has become a problem again. In the United States, all-item inflation was higher than expected for the fourth straight month, with new upward momentum reported in March.

The expectation is the Federal Reserve’s preferred indicator, the PCE price index. – It is expected to show an increase for three consecutive months in March.

To zoom in a bit, one of the biggest problems for investors and consumers is medical inflation. For example, my health insurance premiums have risen by double digits this year.

The biggest problem for insurance companies and the medical industry as a whole is rising costs. As the Wall Street Journal reported last year, “A family’s health insurance premiums will cost about $24,000 this year after the biggest increase in more than a decade.“

The reason I’m telling this story is because I’m very interested in healthcare. A company with pricing power.

These companies can help us achieve our retirement goals as well as protect our wealth from general inflation issues and what could be a long-term rise in healthcare inflation due to secular drivers such as an aging population.

That’s right there Abbott Laboratories (New York Stock Exchange: ABT) Come in.

On April 20th I wrote an article titled: “To $300,000 in 20 Years? Building a $10,000 Dividend Portfolio from Scratch.”

Abbott was one of the holdings I presented in that article because it has a strong portfolio of healthcare businesses, a 2.1% dividend yield, a 5-year dividend CAGR of 12.1%, a payout ratio of less than 50%, and over 50 years of consecutive annual dividend yields. . The dividend has been raised, making it one of the few dividend kings in the market.

Note that the big drop in the dividend chart below was caused by the AbbVie (ABBV) spinoff. ABT did not cut its dividend. Since the spin-off, ABBV has increased its dividend every year.

My most recent article on this stock was written on January 29th. “The King is Back: Abbott Laboratories’ Path to Annual Returns Beyond 11%.”

ABT has since fallen 5% including dividends, falling about 580 basis points behind the S&P 500.

The good news is that ABT has still been a better investment compared to the S&P 500 over the past decade.

In this article, I’ll reassess the risk/reward and explain why ABT remains one of my favorite dividend growth stocks that offer both safety and income growth.

Even better, the company just released its first quarter ’24 results, so there’s a lot of new data to work with.

So let’s get started!

Post-Covid, Abbott is still going strong.

Abbott is one of the health care companies that has benefited enormously from the pandemic. Ultimately, demand for testing (among other products) exploded as the world tried to figure out how to deal with the new virus.

Demand for these products has plummeted since the pandemic, creating a somewhat tricky situation where many powerful healthcare companies are suddenly reporting dire growth rates and investors are dealing with tricky valuations.

The chart below compares the ratio between ABT’s total return and the S&P 500’s total return. Although ABT has consistently outperformed the market, it has underperformed from the moment the world learned that COVID-19 was not actually the end. of the world.

This may be bad news for investors who were looking to make a quick buck with Abbott, but we believe this brings new opportunities as Abbott’s core business remains in fantastic shape.

For the just-announced 1Q24 quarter, the company reported adjusted earnings per share of $0.98, which beat analyst consensus estimates by a penny. Organic sales from non-COVID businesses increased 10.8%.

Even better, as we’ll discuss later in this article, the strong performance led to upward revisions to the midpoints for both earnings per share and revenue growth guidance ranges.

Looking more closely, we see an 8% increase in sales on an organic basis in the nutrition category.

This growth was primarily driven by strong performance in the pediatric nutrition segment, driven by continued market share growth in the U.S. infant formula business and expansion of the company’s international portfolio of infant formula, infant and adult nutrition brands.

Additionally, growth was boosted by the launch of Protality, a new nutritional shake designed to maintain lean muscle mass while supporting weight loss in adults.

Interestingly, this product comes at a good time when weight loss drugs like GLP-1 are turning into growth engines.

Even better than the 8% growth in Nutrition was the 14% organic growth rate in the Established Pharmaceutical Division (“EPD”).

According to Abbott, the division not only achieved impressive gains in revenue growth, but also significantly improved operating margins, including an improvement of more than 350 basis points compared to 2019.

The Diagnostics segment recorded sales growth of 5%, excluding COVID-19 testing. Including the 20.9% decline in COVID-related sales, organic growth would have declined 15.5%.

Organic growth due to COVID-19 was supported by the adoption of the company’s “market-leading” systems and increased demand for testing from a wide range of customers, including hospitals, laboratories, urgent care centers, clinics, retail pharmacies and blood testing facilities. .

Additionally, a point-of-care diagnostic test for mild traumatic brain injury, or concussion, received FDA approval during the quarter, according to the company.

This could potentially change concussion testing standards.

Whole blood testing using a portable device helps clinicians evaluate patients 18 years of age and older with suspected mTBI or mild traumatic brain injury, commonly known as a concussion. Test results can help rule out the need for a head CT scan and determine the best next steps for patient care.. – Via PR Newswire

Finally, the Medical Devices segment saw a significant 14% increase in organic sales during the first quarter.

Within Diabetes Care, FreeStyle Libre sales grew to $1.5 billion. One of my favorite healthcare niches has a growth rate of 23%. In fact, the company’s blood glucose meters have become the best-selling products in their market.

In addition to concussion testing and glucose innovations in general, the company has also launched products such as the TriClip and Aveir leadless pacemakers for heart valve repair.

In the rhythm management segment, growth of 7.5% was driven by the recently launched Aveir, a lead-free pacemaker. Aveir has quickly gained market share in the single chamber pacing segment of the market and is currently used in dual chamber pacing, which is the largest segment of the pacing market. This innovative technology is helping the Rhythm Management business segment deliver growth rates that far exceed the overall growth of this market. – ABT 1Q24 performance presentation

Rosy outlook and good news for shareholders

As briefly mentioned earlier, strong core sales and performance led to the guidance increase.

Adjusted earnings per share are currently expected to be in the range of $4.55 to $4.70.

Additionally, organic sales growth, excluding sales related to COVID-19 testing, is expected to be 8.5-10%.

The ‘problem’ with this EPS guidance is that analysts were disappointed that the company did not raise the upper end of its guidance range.

The ceiling definitely stays the same and that’s the point. “If expectations are exceeded, the stock price will rise,” said RBC Capital Markets analyst Shagun Singh.

“If you’re maintaining expectations, it’s already reflected in the stock price… so that’s the way things are going,” she said, adding that she remains positive on Abbott. – Via Reuters

So what does all this mean for investors?

We know Abbott is in a bit of a difficult situation, as it’s hard to value a stock with significant COVID-19 headwinds.

However, we really like the company’s long-term growth potential and focus on shareholders through continued dividend growth.

ABT currently trades at a blended P/E ratio of 23.9x, which is higher than its 20-year average of 19.8x.

However, as I wrote in my last article, I think the five-year normalized P/E ratio of 25.9x is a fairer metric because the company is in a situation where temporary post-pandemic headwinds are clouding the picture.

The good news is that despite these headwinds, analysts are forecasting EPS growth of 4% this year, followed by 11% growth in 2024 and 2025.

Applying a 23.3x multiple (lower than the five-year average) would yield a potential total return of 10%, including the company’s 2.1% dividend. In my opinion, a higher number is impossible.

Although ABT may be going through some rough times, I think it’s a fantastic dividend growth stock that is likely to outperform over the long term.

So, I’m currently looking to add a few companies to my 20 stock portfolio, so I’m looking for a way to fit ABT into my portfolio.

takeout

Investing in Abbott Laboratories offers an opportunity for long-term growth and stability in light of inflation concerns.

Despite recent challenges, ABT’s core business remains strong, with impressive performance across sectors including nutrition and medical devices.

Meanwhile, the company continues to see success through its focus on innovation, supported by products like Protality and FreeStyle Libre.

Although near-term headwinds may impact its valuation, ABT’s continued dividend growth and potential for future earnings growth make it an attractive investment.

With analysts predicting positive EPS growth and a potential total return of 10%, ABT remains an attractive choice for investors seeking both income and growth in uncertain times.

strength and weakness

Advantages:

• Stability even amid inflation: ABT provides stability during periods of inflation through a diversified portfolio that includes essential healthcare products and pricing power.
• Strong core business: Despite recent challenges, ABT’s core business remains strong, evidenced by its impressive performance in sectors such as nutrition and medical devices.
• innovation: The company’s commitment to innovation through products such as Protality and FreeStyle Libre positions the company for long-term growth and market leadership.
• Continued Dividend Growth: ABT’s track record of consistent dividend growth makes it an attractive choice for income-focused investors.

disadvantage:

• Assessment tasks: Near-term valuations may be affected by headwinds following the pandemic, potentially impacting near-term returns.
• uncertainty: Related to the above, the continued impact of COVID-19 on healthcare demand creates uncertainty about future revenue and growth prospects.
• compete: ABT operates in an attractive market with passionate colleagues, although it remains strong in light of the competition.