Building My Dividend Portfolio
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is part one of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced.
Since I’ve become interested in dividend-paying companies, I am constructing a model portfolio that I will present to the Motley Fool community, I am now planning to dig deeper into individual companies that are working their way to the top of my list.
I’m planning to introduce one individual company each week until I have added ten companies to my initial portfolio. I will add from there as funds permit and as I discover new companies worth adding.
I review the company on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE and payout ratio.
I constructed a rating system that awards points for each of the previous criteria. A “perfect” score would be 28 points, with 4 points awarded for all seven categories. The highest score that was realized by any company that I have examined so far is an 18, and it is awarded to Abbott Laboratories (NYSE: ABT).
Abbott's is in the business of discovering, developing, manufacturing, and selling a broad and diversified line of health care products. The company is in the Healthcare industry and the Major Drug Manufacturers sector. The company has four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products.
The company employs approximately 90,000 and does business in more than 130 countries. Abbott is one of the largest companies in the healthcare industry, with a market cap of $103 billion and total revenue of $39 billion.
Abbott has just announced that, effective January 1, 2013, it will be splitting the company into two separate companies. Abbott Labs will continue to house its medical devices, diagnostic equipment and nutritionals businesses, and any drugs which have lost patent protection.
Shares of the new company, AbbVie, will be awarded to Abbott shareholders on a 1:1 basis, and will contain the company’s branded pharmaceuticals, as well as any experimental drugs under development. These shares will begin trading on January 2 on the NYSE under the ticker symbol ABBV, and will be awarded to Abbott shareholders of record on December 12.
In terms of its potential as a dividend-generating stock, I look at the current dividend metrics. Abbott Labs’ yield is 3.1% and it has a 40-year history of consistently paying and raising dividends. The company last raised its dividend on April 12, with an increase of 6.25%. The company pays out a very reasonable 49% of its earnings as dividends, making the current dividend quite sustainable.
The company’s 5-year DGR is 10.3%, which exceeds my threshold of 7.0%. The earnings growth rate as estimated by the 20 analysts who cover the company is 9.0%, as compared to the growth rate for the industry of 12.1% and for the sector of 13.9%. (The S&P 500 5-year EGR is currently 9.1%.) The company’s EPS growth, TTM versus Prior TTM, is 41.5%.
Abbott’s earnings estimate for FY 2012 (reported January, 2013) is 9% higher than FY 2011, and its estimate for FY 2013 is 4% higher than for 2012.
The TTM EPS figure is $4.11, which gives the company a TTM PE of 15.8, based on today’s price of approximately $65. This PE is not only lower than the industry PE of 24, it is the lowest Abbott’s has been since June 2010.
The 3rd Quarter earnings, when reported in October, beat consensus by 2 cents ($1.30 versus $1.28 expected) and were up 10% versus last year’s 3rd Quarter earnings.
Abbott is currently trading at about 10% less than its 52-week high of $72.47, reached in October, and up 21% from its low of a year ago. Its twelve month total return is 24.0%.
The Motley Fool community rates Abbott a five-star CAPS pick, with 2549 Bulls and 94 Bears. Professional analysts rank it a 2.7 (1.0 = Strong Buy, 5.0 = Sell) with 2 Strong Buys, 5 Buys, 12 Holds, and 1 Sell. They have assigned an average target price of $71.36.
I also looked at another dividend-payer in the healthcare industry, Johnson & Johnson (NYSE: JNJ). I know that JNJ is an extremely popular stock for dividend portfolios, but here’s how it lines up according to my criteria:
Years 50 years
Total Return 13.9%
Payout Ratio 80%
JNJ’s main trouble spots on my list are the PE, which is higher than 20, and the payout ratio, which is higher than 70%.
JNJ actually scored only a 13 on my Dividend-Rating system, whereas Abbott scored an 18. Stocks that score only a 13 are not ever going to make my portfolio, unless something dramatically changes to bring their scores up.
With its dependable dividend-paying and dividend-growing history, decent future growth opportunities, reasonable PE, and favorable investor opinion, Abbott Laboratories is now the first stock in my new dividend model portfolio.
I will begin tracking it based on the closing price on the day that this article is syndicated.
khern0203 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company and Lockheed Martin. Motley Fool newsletter services recommend Cracker Barrel Old Country Store. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!