Abbott Labs passes the test as long-term investment
Published: May 17, 2011
Time posted: 9:54 am
Dear Mr. Berko: I need your advice. I’m thinking of buying 100 shares of Siemens or 300 shares of Abbott Labs.
My broker would rather I purchase a mutual fund that owns both issues. But as you might suggest, he’s trying to make a 6 percent commission. And, as you know, his American Funds recommendation has an excellent record.
I want to buy either Siemens or Abbott and would appreciate your recommendation. –E.P., Joliet, Ill.
Dear E.P.: Siemens (SI, 52-week high of $146.74 as of May 2) is a $110 billion revenue company homeported in Munich. This huge conglomerate generates billions in revenues from electronics, engineering, health care, energy, heavy machinery, transportation, finance, real estate, communications, infrastructure construction, scientific/medical equipment, information services, power plants and software services.
Earnings for 2011 are expected to rise to $9.50 from last year’s $6.50, and the Street thinks SI can earn $10.70 in 2012. SI’s balance sheet is as strong as oak and rock. It’s managed by a group of Teutonic aristocrats, and many on the Street compare SI’s business model to General Electric.
Meanwhile, SI has recovered nicely from its $44 low in early 2009, and the generous $3.68 dividend yields 2.7 percent. Therefore Fidelity, Wellington, Franklin, FMR, etc., hold billions of dollars of SI shares, believing the company has an enormously profitable future.
But I do not trust a company that does billions of dollars of business in Iran, building their locomotives, repairing their infrastructure, constructing power plants and otherwise providing financial assistance, guidance and comfort to the Iranian government. This is a case in which money, corporate greed and profit trumps national security and patriotism. SI is on my “I will never buy” list.
So, hands down, it’s a no-brainer: Abbot Laboratories (ABT, $53.75 as of May 12), without question, is an infinitely superior long-term investment.
This $35 billion drug company has been discovering new medicines and developing new technologies during the past dozen decades. Its highly regarded diagnostics division, its top-tier vascular sector, its leading nutritional products department and an impressive lineup of patent-protected drugs from its pharmaceutical division give ABT a strong economic moat.
While diagnostic and nutritional revenues barely budged last year, pharmaceutical and vascular revenues grew 22 percent and 19 percent, respectively, helping earnings to increase from $3.72 in 2009 to $4.18 in 2010.
It should be noted that nutritional sales were severely impacted last year by a huge infant formula recall. But nutritionals are back on track, and ABT is on track to earn $4.65 this year, sporting an attractive price/earnings ratio of 10.7.
Those earnings should encourage management to increase its dividend $1.92 to $2.09 in the coming dozen months, which would be ABT’s 36th consecutive dividend increase. And if ABT’s dividends continue to increase at an average annual 7 percent rate, when you are ready to receive your Social Security benefits in 2021 each ABT share might easily pay a dividend of $4.11.
In the next four years, ABT’s respected drug formularies and its excellent diagnostics, vascular products and nutritionals could grow revenues to about $45 billion, earnings to $5.80 and dividends to $2.46 aided by record net profit margins of almost 20 percent. The current 3.8 percent yield plus continued annual dividend increases make it easy to hold this stock for 10 years.
Many believe ABT should trade above 15 times earnings and with a share price between $80 and $90 a share. So I would really rather you owned 300 shares of ABT than 100 shares of SI.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at email@example.com.