An unexpected diabetes partnership with Medtronic bodes well for Abbott’s biggest growth driver.
According to a bullish Wall Street analyst, Abbott Laboratories (ABT -0.84%) stock could outperform for investors. Following the company’s latest earnings report, Matt Miksic from Barclays maintained his buy rating and raised his price target to $143 per share.
At recent prices, Miksic’s price target predicts a gain of about 32% once the rest of the stock market sees Abbott Laboratories in the same light as he does.
In the “pro” column, Abbott Laboratories recently announced an advantageous deal with Medtronic (NYSE: MDT), another leading medical device maker. In the “con” column, Abbott attracted a hefty penalty related to a baby formula lawsuit.
Can Abbott overcome its challenges to deliver a market-beating performance? Let’s look at both sides.
Reasons to buy Abbott Laboratories now
It’s been over 100 years since Abbott Laboratories shareholders did not get a quarterly dividend payment. Moreover, the company has raised its payout for 52 consecutive years. At recent prices, the stock offers an uninspiring 2% yield, but it could become a big source of passive income in the coming years.
Abbott’s dividend payout isn’t just rising, it’s soaring. It’s up by 72% over the past five years thanks partly to company success due to sales of diabetes devices that could shift into an even higher gear.
The latest version of Abbott’s continuous blood-glucose monitor (CGM), FreeStyle Libre 3, launched in the U.S. market in late 2022. That was about eight months ahead of its top competitor, Dexcom‘s G7.
Abbott has hung on to its early lead with second-quarter FreeStyle Libre sales that soared 18.4% year over year to $1.6 billion. Over the same time frame, Dexcom reported revenue that grew by 15% to an even $1 billion.
As a diversified conglomerate, Abbott can afford to price its CGM competitively, and this isn’t the only reason to expect continued dominance in this space. Recently, Abbott announced a new partnership with Medtronic, the world’s leading manufacturer of medical devices.
Abbott will contribute CGM technology to a new integrated system that includes Medtronic’s automated insulin delivery technology and its smart insulin pens.
Abbott’s CGM franchise is an important growth driver, but it isn’t the only revenue stream that’s getting bigger. The company’s nutrition and established pharmaceuticals segments reported strong growth in the most recent quarter and so did diagnostics if you exclude the impact of COVID-19 tests.
With all of its operating segments moving in the right direction, Abbott reported total first-half sales that rose 10% year over year, if you ignore COVID-19 tests and the negative effects of currency exchange.
Shares of Abbott are not as highly valued as you might expect for a company growing sales by a double-digit percentage. At recent prices, you can scoop up shares for about 23 times the midpoint of management’s adjusted earnings estimate for 2024.
Reason to avoid Abbott Laboratories
While Abbott investors are most interested in its innovative medical devices, it’s also a leading producer of baby formula and adult nutrition supplements.
However, Abbott’s nutrition segment could become an albatross. In July, a jury in St. Louis ordered the company to pay $495 million over allegations that it hid the risk that its premature-infant formula could cause a severe bowel complication called necrotizing enterocolitis (NEC). The company plans to appeal.
The recent verdict against Abbott might not be the last. At the end of January, Abbott was a party to 993 lawsuits in state and federal courts.
Is the stock a buy now?
Abbott does not expect a material loss from NEC lawsuits and plans to appeal the latest ruling against it. I agree that proving Abbott’s baby formula is responsible for NEC cases will be an uphill battle, so there’s a good chance that the first verdict to go against Abbott can be overturned on appeal. Missouri civil law doesn’t require unanimous jury verdicts and in this case, only nine out of 12 were in agreement.
Over the past year, Abbott’s operations generated $5.7 billion in free cash flow and the company only needed 65% of this sum to meet its dividend obligation. Even if the company ends up spending more than $1 billion related to NEC lawsuits, it will still have plenty of profits left over to invest in the future and raise its dividend payout. Buying the stock now and holding it over the long run looks like a smart move.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool recommends Barclays Plc, DexCom, and Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.
