Abbott Has Good Chemistry

05/16/2011 2:24 pm EST


Jim Jubak

Founder and Editor,

You can certainly find stocks with a higher dividend yield than the 3.4% that Abbott Laboratories (ABT) paid when I added it to my dividend income portfolio on May 6. (It closed that day at $52.52.)

But I think you’ll be hard pressed to find a stock paying that much that has the same potential for very safe and steady growth. (See my recent post for my latest update of that portfolio.)

Abbott is among the most balanced of the big US drug companies. Pharmaceuticals accounted for just 56% of sales in 2010, with the rest coming from nutritional products (16%), diagnostic products (11%), and a vascular business (9%) that makes stents and catheters.

The drug business itself is diversified across existing and potential blockbusters, such as Humira and Kaletra, potential new drugs from the four new molecular entities in late stage development and the 20 that the company projects will be in Phase 2 or Phase 3 clinical trials by the end of 2011, and recent acquisitions that have expanded the company’s market share in emerging economies such as India. (57% of Abbott Laboratories’ sales now come from overseas.)

I think investors can pretty much count on an 8% increase in sales in 2011, and a slight increase in gross margins from the 60.2% gross margin of 2010.

Earnings growth of a little better than 10% is very likely for 2011. That earnings increase gives me a target price of $60 a share by the end of 2011. That would be roughly 12% price appreciation from the May 13 close of $53.49.

The combination—3.4% yield, 12% capital gains, and well above average safety—makes this an attractive stock for my dividend income portfolio. And with current market volatility, indeed for any portfolio.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of Abbott Laboratories as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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