When fear and uncertainty hit the stock market, investors typically head for safer harbors. That can manifest in many ways, from very conservative investments like Treasury bills to investments that still provide market exposure, yet are historically less volatile, such as blue chip dividend stocks.
There are two key reasons why blue chip stocks that pay a dividend are attractive during a volatile stock market. First, with their consistent dividends, these stocks can provide a baseline of returns whenever the broad market treads water or turns negative. Second, these stocks typically have decades-long dividend growth track records.
Past performance may not be indicative of future performance, but these types of stocks typically gain steadily over time in tandem with rising payouts. Hence, with both steady dividend and appreciation potential, they can perform well in both bull and bear markets.
Out of scores of high-quality dividend stocks, including Dividend Kings (companies with over 50 years of consecutive dividend growth), Abbott Laboratories (NYSE: ABT) stands out as a name to buy and hold if one fears a more volatile stock market is just around the corner.
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Abbott Laboratories: A Dividend King on sale
Illinois-based Abbott Laboratories is a diversified healthcare products company. Besides being a major player in the world of medical devices and diagnostics, Abbott is also the company behind products like Similac baby formula and Ensure nutritional supplements.
Today’s Change
(0.87%) $0.81
Current Price
$94.06
Key Data Points
Market Cap
$162B
Day’s Range
$93.21 – $95.18
52wk Range
$81.97 – $137.49
Volume
376.7K
Avg Vol
12.9M
Gross Margin
52.84%
Dividend Yield
2.62%
With this mix of defensive healthcare businesses, it’s no wonder that the company has managed to reach Dividend King status. For 55 years in a row, Abbott has raised its quarterly cash dividend. Currently, the stock has a forward yield of around 2.8%. That may make it a moderate yielder rather than a high yielder, but Abbott’s yield today could snowball into larger yield on cost in the long term.
Why? Over the past decade, Abbott has raised its payout by an average of 9.4% annually. Although dividend growth has slowed down in recent years to around 7%, don’t rule out the potential for dividend growth to speed back up again, especially as this company has a payout ratio (the dividend as a percentage of earnings) of 41.6%. For reference, a payout ratio below 50% is considered very sustainable.
On top of its dividend growth bona fides, Abbott Laboratories trades at a discount to diversified healthcare stocks. While Abbott Laboratories trades for 16.5 times forward earnings, competitors like Johnson & Johnson trade for more than 20 times forward earnings.
Recent pullback works in your favor
While you may agree Abbott Labs has all the makings of a safe-harbor stock, you may also be asking, “If this stock is relatively safe, why has it pulled back so much, in the middle of a bull market, no less?” A key reason for Abbott’s recent weak price action has to do with a one-time event: Abbott’s $21 billion acquisition of Exact Sciences.
The company closed on this acquisition in March, but since the deal was announced late last year, investors have remained concerned about this acquisition’s impact on near-term earnings. Yet, while Abbott has admitted that the transaction will be immediately dilutive to earnings, in the long run, this deal bodes well for overall growth.
By purchasing Exact Sciences, the company behind products like Cologuard and Cancerguard, Abbott has now become a leading name in cancer diagnostics. In the long term, as the company pivots toward faster-growing healthcare segments, perhaps jettisoning more mature businesses like its nutritional products business along the way, this could translate into greater earnings growth, greater dividend growth, and even stronger long-term stock performance.
This acquisition could prove an opportune time to add Abbott Laboratories to a long-term portfolio. In the short-to-medium term, especially if volatility hits the market, investors could rotate back into this Dividend King. Over a multiyear time frame, as recent acquisitions like Exact Sciences help to elevate growth, shares could keep generating strong total returns.
