Abbott Laboratories (ABT) recently increased its dividend for the 50th consecutive years. As a result, it has joined the list of Dividend Kings.

The Dividend Kings are a group of just 38 stocks that have increased their dividends for at least 50 years in a row.

We believe the Dividend Kings are among the highest-quality dividend growth stocks to buy and hold for the long term.

Abbott is a diversified healthcare giant. It has a long runway of growth up ahead.

While the stock appears overvalued, it can continue to be relied upon for annual dividend increases.

This article will discuss the company’s business overview, growth prospects, competitive advantages, and expected returns.

Business Overview

Abbott Laboratories is a healthcare stock with a market capitalization of $215 billion. The company was founded in 1888 and is headquartered in Lake Bluff, Illinois.

The company operates in four main segments: Nutritional Products, Established Pharmaceuticals, Diagnostics, and Medical Devices. Abbott enjoys a leadership position across product segments.

On January 26th, 2022, Abbott Laboratories reported Q4 and full year 2021 results for the period ending December 31st, 2021.

For the quarter, the company generated $11.468 billion in sales (58% outside of the U.S.) representing a 7.2% increase compared to Q4 2020.

Source: Earnings Infographic

Results were up across the board with Diagnostics, Established Pharmaceuticals, Medical Devices, and Nutrition sales increasing 2.9%, 4.9%, 15.1%, and 5.5% respectively. Adjusted earnings–per–share equaled $1.32 compared to $1.45 in Q4 2020.

For the year, Abbott Laboratories generated sales of $43.075 billion, a 24.5% increase compared to 2020.

Results were once again up across the board with Diagnostics, Established Pharmaceuticals, Medical Devices and Nutrition sales increasing 44.8%, 9.6%, 21.9%, and 8.5% respectively.

Adjusted earnings–per–share equaled $5.21, ahead of prior guidance, compared to $3.65 in 2020.

The company’s high-quality product portfolio should fuel strong growth for the next several years.

Growth Prospects

Along with its fourth-quarter results, Abbott Laboratories also provided 2022 guidance, anticipating at least $1.50 in adjusted EPS for Q1 2022 and at least $4.70 in adjusted EPS for the year.

Looking ahead, Abbott Laboratories has two major growth prospects for the years to come.

The first is the aging population, both domestically and within the United States. In 2019, the percent of the global population that exceeded age 65 was 9.1%. This proportion is expected to reach 16.7% in 2050.

The second broad tailwind that will benefit Abbott Laboratories is the company’s focus on emerging markets. This is particularly true for its Branded Generic Pharmaceuticals segment.

Abbott has a strong position in growth markets such as diagnostics. It is the market leader in point–of–care diagnostics, and cardiovascular medical devices.

Lastly, earnings-per-share will be boosted by share repurchases. Abbott recently authorized $5 billion in share repurchases.

As a result, Abbott should be able to generate attractive long–term growth rates for both earnings–per–share and dividends. Overall, we expect 5% annual earnings-per-share growth for Abbott over the next five years.

Competitive Advantages & Recession Performance

Abbott Laboratories’ first competitive advantage is its brand recognition among its consumer medical products, particularly in its Nutrition segment.

Led by noteworthy products like the Ensure meal replacement supplement, Abbott Laboratories brands allows its sales to stand strong through even the worst economic recessions.

The second component of Abbott’s competitive advantage is its focus on research and development. The company’s R&D expense over the last five years is shown below:

• 2017 research & development expense: $2.2 billion
• 2018 research & development expense: $2.3 billion
• 2019 research & development expense: $2.4 billion
• 2020 research & development expense: $2.4 billion
• 2021 research & development expense: $2.7 billion

Abbott Laboratories’ investment in research & development shows that the company is willing to play the long game, building out its product pipeline and improving its long-term business growth prospects.

As a large, diversified healthcare business, Abbott Laboratories is extraordinarily recession-resistant. The company actually managed to increase its adjusted earnings-per-share during each year of the 2007-2009 financial crisis.

• 2007 earnings-per-share of $2.84
• 2008 earnings-per-share of $3.03 (6.7% increase)
• 2009 earnings-per-share of $3.72 (22.8% increase)
• 2010 earnings-per-share of $4.17 (12.1% increase)

As you can see, Abbott actually grew its earnings-per-share in each year of the Great Recession.

We expect this recession-resistant Dividend King to perform similarly well during future downturns in the business environment.

From a dividend perspective, Abbott’s dividend also appears very safe. The company has a projected dividend payout ratio of 40% for 2022.

Abbott recently increased its dividend by 4%. The next dividend will be the company’s 392nd consecutive quarterly payout.

Valuation & Expected Total Returns

Based on expected EPS of $4.75 for 2022, Abbott stock trades for a price-to-earnings ratio of 26.8. The current valuation is noticeably higher than its long-term average.

Our fair value price-to-earnings ratio is 20, meaning the stock appears to be overvalued. A declining P/E multiple could reduce annual returns by 5.7% over the next five years.

The other major component of Abbott Laboratories’ future total returns will be the company’s earnings-per-share growth. We expect 5% annual EPS growth for the company.

Lastly, Abbott’s total returns will receive a boost from the company’s dividend payments. Shares currently yield 1.5%.

Overall, Abbott Laboratories’ expected total returns will be composed of:

• 5% earnings-per-share growth
• 1.5% dividend yield
• -5.7% multiple reversion

Total expected annual returns are forecasted at just 0.8% through 2027. This is a low expected rate of return, due to the overvaluation of the stock right now.

Final Thoughts

Abbott Laboratories has a long history of growing its profits and dividends, thanks to its strong brand portfolio.

While the company’s current valuation exceeds its long-term average, Abbott Laboratories remains a hold.