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Finally, a Reasonable Price For This Healthcare Blue Chip

The investor community holds high regard for healthcare conglomerate Abbott Laboratories (NYSE: ABT). Shares rarely come cheap, typically commanding a higher valuation than the S&P 500.

However today Abbott Labs is trading nearly 30% below its high, thanks to recent volatility on Wall Street.

The stock has crushed the market over the past five years, and the current dip may give investors a chance to do it again over the next five. Here is why Abbott Labs is a fantastic buy today.

COVID-19 carrying growth in the near term

Abbott Labs is a healthcare company that designs and sells various products, including consumer products, generic drugs, medical devices, lab equipment, and supplies. The business generated more than $44 billion in revenue over the past four quarters.

Abbott’s revenue has grown by an average of 15% annually over the past five years, while earnings-per-share (EPS) has averaged 33%. The company has a significant presence in diabetes, where its non-invasive glucose monitoring product, the FreeStyle Libre, grew sales 20% year over year in the first quarter of 2022 to $1 billion. It also has a substantial medical device segment, selling a range of cardiovascular products like pacemakers and pumps.

The company built a device that can rapidly diagnose COVID-19, which has helped carry growth throughout the pandemic. Its rapid test system made $3.5 billion worldwide in Q1 2022, a 57% increase over the prior year. Abbott’s total revenue grew by 13.8% year over year in Q1; COVID-19 rapid test sales could eventually fade, but Abbott’s a diverse company that grows in many ways.

A profitable business giving cash to investors

Healthcare has changed so much over time, so Abbott’s dividend track record might best speak for its long-term success. The company is a Dividend King with 50 consecutive years of dividend increases.

That means passive income for investors; the stock’s dividend yield is currently 1.8%, which likely beats putting money into a savings account. You can see below how steadily Abbott has grown over these decades, except for a massive spin-off in 2013 to form AbbVie from its pharmaceutical segment.

ABT Revenue (TTM) data by YCharts.

Abbott is very profitable, turning about $0.20 of each revenue dollar into free cash flow, which are cash profits that management can use to pay a dividend, repurchase its stock, or save on the balance sheet.

The stock is on sale

Remember I said that the stock rarely comes cheap? Investors should celebrate the occasional sale. Looking at valuation through the price-to-earnings ratio (P/E), Abbott Labs has commanded a median P/E of 31 over the past decade. The S&P 500’s historical average P/E is 15, so investors have been willing to pay a hefty premium to own shares.

Management is guiding non-GAAP (adjusted) EPS of $4.70 for 2022, pricing the stock at a P/E ratio of just under 22. Think of it as a sale where you can buy the stock at a 30% discount.

This isn’t the case every time; a stock that declines due to bad fundamentals, like slowing growth or a damaged balance sheet, can be a trap that investors occasionally fall into. However, Abbott’s continued growth and healthy profitability show that the stock’s decline is likely more opportunity than a mirage.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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