Count me as a retired investor who is uncertain as to how to proceed in today’s highly fraught market environment. The thesis of this article is that Abbott (NYSE:ABT) should be in top contention for a role in everyone’s retirement portfolio and in the portfolios of those who hope to retire in the future.
Let me explain.
Abbott is a dividend aristocrat that has both a solid record of performance and a carefully assembled suite of businesses for future success
Abbott’s past accomplishments are notable. As I started this article in late October 2020, I ran a google search for “Abbott dividend aristocrat”. It returned the following result prominently placed:
Having paid dividends for nearly a century and having increased them for nearly a half century, Abbott’s past dividend record is pristine. What about its future? I submit that we shareholders are in a solid position here also.
As for its suite of businesses, take a look at the following excerpt from Abbott’s Q3, 2020 presentation graphic:
Abbott has carefully assembled its four units: medical devices, diagnostics, established pharmaceuticals and nutrition. These were bolstered by key acquisitions in 2017. As I noted previously in “Abbott: Triumph Upon Triumph”:
Abbott is among the world’s leaders in each segment. Abbott has kept each segment’s products fresh and relevant.
Abbott has transformed its 2016/17 seemingly misbegotten purchase of Alere into one of its pathways to prosperity
Former Abbott CEO White assembled Abbott’s businesses carefully over time. His goal for the Alere acquisition was to position Abbott as number one in rapid diagnostics.
As is often the case in such transactions, there were concerns in the early going that Abbott overpaid for Alere. These concerns were exacerbated during the acquisition phase when Alere had reporting difficulties that almost scuttled the deal. Once the deal finally closed, Abbott turned to its long practiced techniques of integrating the newcomer, which it accomplished in “warp speed“. During Abbott’s Q4, 2017 earnings call, CEO White described the process as:
On Alere, I’d say our team has done a terrific job. We have an entirely new, from Abbott, management team there. I’d say their progress in terms of integration, reorganization, etc. has gone extremely well. Literally within a couple of weeks, we reorganized the entire company into business units, fully integrated business units with management teams and so forth. I’d say that our assumption of the business has gone at warp speed and gone well. We’re ahead of schedule on literally everything, on target on our synergies. We’re ahead of our targets on sales and profit…
Moving forward to Abbott’s Q3, 2020 earnings call, Abbott’s current CEO Ford describes how Alere is taking a leading role in an important new paradigm. Its suite of reasonably priced COVID-19 tests are:
… executing on the vision that we had when we bought Alere where we wanted to build a premier point of care business, so that we could decentralize test, so that we could democratize test and so that we could digitize test.
Critically, this is not a strategy doomed just to ramp during the pandemic, only to wither on the vine once the scourge has passed. To the contrary, COVID-19 is the door-opener providing access to medical venues that would otherwise take years to develop. Again, as noted by CEO Ford:
… the installed base that we built during this period [of heavy COVID-19 testing], the consumer behavior that’s been created, the new channels that we’ve opened up with rapid testing, whether it’s airports, retail stores, more physician’s offices, the app ecosystem that we’re building, all that is going to remain, and it’ll remain for all the other assays that we currently have and that we’ll be rolling out. So I think that as we look at 2021, into 2022, it’s going to be COVID testing, but it’s more importantly, to look – the way we’re looking at it is the execution of that Alere strategy, which is to build a whole new testing platform outside of the walls of a lab in a hospital. And the COVID has actually given us an opportunity to accelerate that strategy.
Abbott’s shareholder-friendly approach to capital allocation reflects its strong growth prospects and its commitment to fundamentals
During Abbott’s Q3, 2020 earnings call, Evercore analyst Kumar teased out the impressive fundamentals underlying Abbott’s current financial condition. Noting Abbott’s healthy balance sheet, Kumar asked CEO Ford what Abbott considered as an optimal capital structure for the company.
In this regard, Abbott is generating solid profits, with a quant profitability rating of A+, or as CEO Ford put it, “nice cash“. The great news for shareholders is that Abbott, in addition to its extraordinarily long-lived commitment to its dividend, has productive uses for its cash. Abbott downplays share repurchases, generally limiting them to offset dilution. I have long considered share repurchase as a suboptimal use of corporate capital.
Abbott’s growing businesses offer it ample opportunity to deploy excess capital in organic projects which generate future cash flows. Recent examples include expenditures to expand production of products that are in particular growth mode. CEO Ford described it as:
…applying that cash to invest in areas where we see opportunities for growth, that’s where we’ve been focused on. And I think that’s the best return we’ve got right now for our shareholders. If you look at what we’ve done with COVID and the investments we’ve made there, the speed at which we’ve been able to make those investments and execute it because of that strategic flexibility that we have in the balance sheet, talked about manufacturing expansions with Libre, which we’re definitely going to need as we expand the portfolio and build a portfolio and other parts of our medical devices too.
Abbott’s pipeline regularly feeds its various businesses with new products
The diversity of Abbott’s ever-refreshing pipeline beggars my capacity for accurate and complete summarization. During Abbott’s Q3, 2020, earnings call, CEO Ford hit the high points. He emphasized that Abbott’s pipeline consisted of over a 100 new products across its four business units.
He stated the case for how this positions Abbott favorably for future growth as follows:
We’ve got over 100 new products in pipeline across all of our four businesses that we have planned to launch over the next couple of years. So are there opportunities to accelerate what is already going to be a double digit top and bottom line growth rates? Yeah, there’ll be opportunities to be able to invest in this pipeline, and accelerate the growth there. So I think we’re very well positioned to go from what is a very strong year for us in 2020, to an even stronger year in 2021.
I started this article celebrating Abbott’s storied past as a dividend aristocrat that has paid quarterly dividends since 1924. When I look to its future, Abbott shows every sign of continuing this proud tradition.
I have discussed how Abbott is growing a new ecosystem around its point of care testing devices, most productively over the near term for COVID-19. Its other hot button franchise that has been churning out product improvements since 2017 is its glucose monitoring system, FreeStyle Libre.
Abbott’s latest available 10-Q (p. 21) for Q2, 2020, sets out the scope of this program as follows:
…Growth in Diabetes Care sales was driven by continued growth of FreeStyle Libre®, Abbott’s continuous glucose monitoring system, internationally and in the U.S. FreeStyle Libre sales totaled $1.197 billion in the first six months of 2020, which reflected a 50.4 percent increase, excluding the effect of foreign exchange, over the first six months of 2019 when FreeStyle Libre sales totaled $812 million. In June, Abbott announced U.S. Food and Drug Administration (FDA) clearance of FreeStyle Libre 2 as an integrated continuous glucose monitoring (iCGM) system for adults and children ages 4 and older with diabetes.
During Abbott’s Q3, 2020, earnings call, CEO Ford gave the latest on this fast developing franchise as follows:
…US launch of FreeStyle Libre 2, which sets a new standard of accuracy and performance in the market, CE Mark of Libre 3, which automatically delivers real time glucose readings every minute in the world’s smallest and thinnest wearable sensor, CE Mark of Libre Sense Glucose Sport Biosensor are initial step to expand use of the Libre platform beyond diabetes…
Other areas that merit attention from a pipeline development point of view are its various cardiovascular devices and its Alinity laboratory-based diagnostic products. Cardiovascular devices present an interesting piece of the Abbott story. The COVID-19 lockdowns earlier in the year took a nasty chunk out of Abbott’s revenues as described in detail in Abbott’s Q2, 2020 10-Q (pp. 18-21).
Going forward, Abbott has recovered nicely and is adding to its cardiovascular device franchise with a “very rich” pipeline. In this regard, Ford waxes enthusiastic about upcoming products and enhancements for mitral valve repair, a left atrial appendage device and a transcatheter aortic valve replacement (TAVR).
As I write on 10/29/20, the economic horizon is showing high uncertainty. Clouds of COVID-19 resurgence are gathering in the United States and around the world. The United States political situation is at maximal uncertainty with a hotly contested presidential election unfolding with the Supreme Court possibly having an outsized role in the final decision.
What is an investor to do in this environment? Treasuries and CDs are yielding little more than cash. What to do? Everyone has a different situation. I submit that, for most investors, gradually adding Abbott to their portfolio will improve their long-term results.
Disclosure: I am/we are long ABT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may buy or sell shares in Abbott over the next 72 hours.