How Safe is Abbott's Dividend?

By Dr. Osman Gulseven - September 21, 2012 | Tickers: AZN, BAX, JNJ, PFE | 0 Comments

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Abbott recently reported the full year guidance on for the next year as ranging between $5 and $5.10, thereby highlighting another year of strong performance. These profits are mainly linked with in-process R&D, separating costs, cost-reduction initiatives and acquisition integration. Excluding these specific items, forecasted earnings-per-share under Generally Accepted Accounting Principles would be between $4.29 and $4.39. Abbott's full-year estimate for these particular items has risen from previous company guidelines. The company now includes for its 2012 estimates a one-time splitting up cost, associated with the planned separation of Abbott into two corporations.

Second Quarter Highlights

Abbott documented the following financial outcomes for the second quarter of 2012, which ended June 30.

Diluted quarterly earnings-per-share, taking out the aforementioned particular items, were $1.23, showing a 9.8 percent increase above Abbott's analyst estimates. Similarly, diluted earnings-per-share within Generally Accepted Accounting Principles (GAAP) were $1.08, including these particular items. Meanwhile, worldwide sales improved 6.7 percent, not including foreign exchange, while documented sales rose by two percent, including a damaging 4.7 percent impact from foreign exchange.

Second quarter outcomes included an adjusted gross margin ratio of 63.3 percent, representing a boost of 310 basis points over 2011. The rise in sales figures was driven by superior efficiencies throughout a variety of operating divisions, as well as a beneficial product mix. The gross margin, according to GAAP, was 62.9 percent.

Abbott continues to produce solid results as it remains on track to separate into two top health care corporations. While "in the second quarter" Abbott introduced and advanced several projects in its appealing, broadly based pipeline. The company thereby reached key goals in the separation process.

Stock and Dividend

Abbott's main competitors are Johnson & Johnson (NYSE: JNJ), Pfizer Inc (NYSE: PFE), Baxter International Inc (NYSE: BAX) and AstraZeneca (NYSE: AZN).

Based on the market cap, Abbott falls somewhere in between its competitors. Based on the trailing P/E ratio AstraZeneca is the cheapest one in the group. It is trailing with a single digit trailing P/E ratio. AstraZeneca also offers the highest dividend yield of almost 6%. Johnson & Johnson has the lowest debt. All of the above mentioned companies have Betas lower than the market average. Thus, they can provide a relatively better level of safety againsts market downturns.

The following table visualizes each company's fundamental ratios:

Abbott stock is currently trading at between 69, while I estimate its fair value around $70. Meanwhile, the market capitalization for Abbott stands at $108.1 billion. Abbott has a current dividend yield of 2.9 percent, while its P/S and P/E ratios are at 2.7 and 22.6, respectively.

Abbott Laboratories is certainly one pharmaceutical stock that is gaining significant attention of late. Just look at the stock chart below to understand why Abbott has been so popular among dividend-growth investors. The company's share price has been consistently on the rise since April. Abbott has experienced none of the extreme price falls suffered by many of its opponents. It kept outperforming its peers with relatively lower volatility.

Source: Finviz.com

The Board of Directors has announced the company's quarterly common dividend at 51 cents per share. The cash dividend is payable November 15, 2012, to shareholders at the close of business on October 15. This marks the 355th consecutive quarterly dividend to be paid by Abbott since 1924. Furthermore, Abbott is a member of the S&P 500 Dividend Aristocrats Index, which tracks companies that annually increase dividend yields for 25 or more consecutive years.

Separation into two leading health care companies

Of particular interest is Abbott's current plan to divide itself into two separate publicly traded corporations. According to company strategy, one of the new firms will focus on diversified medical products and solutions, while the other will work in research-centric pharmaceuticals. The diversified medical products corporation will be made up of Abbott's branded, generic pharmaceuticals, as well as equipment, diagnostics and nutritional businesses; this company will keep the Abbott name. Meanwhile, the research focused pharmaceutical corporation, will be titled AbbVie, and will include Abbott's existing portfolio of proprietary pharmaceuticals. I expect the separation to be completed by the end of 2012.

Conclusion

Abbott has managed to separate itself from its competition by a significant margin. Its success has been largely founded on a large collection of patent protected drugs, a top diagnostics business, a powerful nutrition department, and a top-tier vascular group. I expect all of these operations to continue producing solid returns and driving company expansion.

Investors and Abbott shareholders will be particularly interested by the separation of Abbott's pharmaceutical division. It was frequently thought that the motive for the division was simply that the value of the individual companies would be higher than the value of the merged company. However, Miles White, Abbott's CEO, has explained that the two companies will be "valued more effectively" or "liked more by investors" as individual entities than they are at present.

The company currently has significant cash reserves. Each share comes with a cash and equivalent of $7 per share. That is enough to cover the current dividend for the next 14 quarters. Given the stable business revenues, and strong product pipeline, the dividends seem perfectly safe.

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