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Why a Product Recall Won’t Change This Company’s Prospects

Healthcare giant Abbott Laboratories (NYSE: ABT) has underperformed the market this year. Marketwide worries such as rising inflation and geopolitical tensions aside, the medical devices specialist has been hit hard partly due to issues related to its infant formula business. In February, Abbott Laboratories voluntarily recalled infant formula manufactured at one of its U.S. plants after four infants who had consumed the company’s products were hospitalized with bacterial infections.

This problem is worth keeping an eye on as it negatively impacted Abbott Laboratories’ revenue. However, it won’t derail Abbott Laboratories’ long-term prospects, and the company provided more evidence for that in its latest quarterly update. Here’s why Abbott Laboratories’ future remains bright.

ABT data by YCharts

The benefits of diversification

Abbott Laboratories restarted partial production in the facility that manufactured the infant formula in question only last month. The effects of this halt in production are evident in the company’s revenue from its nutrition segment. During the second quarter, this unit delivered about $2 billion in sales, representing a 7.4% year-over-year decline. Excluding sales of the products associated with the recall, Abbott Laboratories’ nutrition revenue increased by 0.5%.

That’s not a particularly impressive jump, but it’s much better than a 7.4% decline. Moreover, this headwind did not have that big an impact on Abbott Laboratories’ overall top line. The company’s sales increased by 10.1% to $11.3 billion. There’s more to the story. Abbott Laboratories is best known for its medical devices. During the second quarter, this segment suffered due to a resurgence of COVID-19 cases in various places around the world.

Abbott Laboratories has been dealing with this issue since the pandemic started. And the healthcare giant continues to keep its revenue and earnings afloat due to the sale of COVID-19 diagnostic products. Abbott’s diagnostics segment reported sales of $4.3 billion during the period, a 33.1% year-over-year increase, largely thanks to $2.3 billion in COVID-19 testing-related sales.

Excluding its coronavirus-related revenue and sales associated with the infant products it recalled, Abbott Laboratories’ revenue would have increased by 1.6% during the quarter. The company’s diversified business helped it get through yet another challenging period. 

A solid long-term pick

Abbott Laboratories’ coronavirus-related headwinds won’t last forever. Nobody knows when the pandemic will officially end but when it does, the company’s medical device business will fully recover. After all, some of Abbott’s key products are still performing well. That’s the case for its continuous glucose monitoring (CGM) system, the FreeStyle Libre. In my view, this device is one of the most important for the future of Abbott Laboratories. 

That’s because CGM technology helps diabetes patients keep track of their blood glucose levels continuously throughout the day and leads to better health outcomes for these patients while reducing the economic burden associated with diabetes. Meanwhile, diabetes is on the rise.

In the second quarter, sales of Abbott Laboratories’ diabetes care products jumped by 12.8% to $1.2 billion — thanks to sales of the FreeStyle Libre increasing by 18.7% year over year to roughly $1.1 billion. Abbott Laboratories boasts various other growth prospects as well, and it is also a solid pick for income-seeking investors. The company is a Dividend King — part of an exclusive group of corporations that have raised their payouts for at least 50 consecutive years.

There will be more dividend hikes in Abbott’s future. Abbott Laboratories’ 1.72% dividend yield is barely above average in the S&P 500, but it has a conservative payout ratio of just 39.67%. Product recalls are rarely good news for a company, and the continued impact of COVID-19 on Abbott’s medical devices segment is worth monitoring. But these short-term roadblocks will do very little to stop the company in the long run. As per usual in the stock market, patience will pay off

Prosper Junior Bakiny 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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