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Abbott Labs: Growth, Yield and Safety

This drug stock offers investors a lot. Is it priced right?
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Our models rate Abbott Laboratories (ABT) - Get Free Report an A+, a grade from Ratings that corresponds to a buy rating.

Abbott's shares are up just about 2.5% year to date, and the drug company just completed another quarter of double-digit profit growth driven by sales of its Humira arthritis medicine and new Xience drug-coated stent.

Other strengths of the company include its low risk of patent expiration concerns, diversified product lines and the non-discretionary nature of its products. These strengths definitely bode well for the company as the economy enters a downturn. In 2001 and 2002, during the last economic downturn, Abbott Labs hardly noticed it and did not miss a beat in terms of its sales and earnings growth.

But what is Abbott's stock roughly worth? The company's financial statements and earnings calls, which are available on the Web, offer some clues.

The most notable aspect of the company's balance sheet is its retained profits totaling $10.8 billion, which has essentially funded a quarter of the company's asset base of $39 billion. The key point is that its book value, asset base and its retained profits have all been growing at roughly the same rate -- 13.9%, 13.5% and 10.6%, respectively -- over the past 10 years.

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Management has done a great job of aligning the company's growth to a sustainable formula that uses internal funding where possible to keep leverage down and at the same time promote growth and pay a regular dividend to investors. That's not an easy balancing act, and it requires a history of solid profitability to pull it off. Earnings-per-share growth has averaged 14.5% over the past decade, which highlights how Abbott's financial metrics have moved in concert through time.

Stability is pronounced for this company as evidenced by its margins over time; gross, operating and net margins average 54%, 19% and 15% respectively. Management has chosen to maintain a stable capital structure for the past 10 years, funding each dollar of assets with 50 cents of equity -- predominantly retained profits (60% of total equity) -- and 50 cents of liabilities. And finally, Abbott has earned a high and relatively stable return on equity of roughly 20%-24% over the past 10 years.

The stock currently trades in the $55 dollar range and yields around 2.6%. Basic valuation techniques place this company's stock in the $25 to $36 range. These valuations would correspond to a dividend yield of 4%-5.4%, which would be very attractive given the current low interest rate environment and the number of investors looking for yield and safety.

In sum, the market likes this stock and there is tremendous support for its share price at an unprecedented time of uncertainty and fear. For this reason it may be unrealistic to expect the stock price to fall to the levels suggested above but keep an eye on this stock -- its share price has fallen into the $30 range before, in 2000 and 2002.