Dividend growth stocks are a powerful tool for wealth creation. The magic of compounding allows these high-quality dividend growers to provide exponential returns to their long-term shareholders.
However, there's a catch: Most premium dividend growth stocks offer tiny yields. This is because there's generally an inverse relationship between a stock's yield and its dividend growth rate. Essentially, companies with high yields often slow down their payout growth to allocate capital more effectively.
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But there's an exception to this trend: Abbott Laboratories(NYSE: ABT).
This diversified healthcare company has been consistently raising its dividend for an incredible 51 consecutive years and paying a cash distribution to shareholders since as far back as 1924. Despite these regular dividend increases, Abbott still boasts an above-average yield of 1.84%, coupled with a remarkable five-year dividend growth rate of 11.4%.
Is this top-tier dividend growth stock still a compelling buy?
Abbott Laboratories' core value proposition
While factors like dividend yields, the history of consecutive payout increases, and a company's dividend growth rate can sometimes mislead investors, the true measure of value lies in the long-term value proposition. This is where Abbott Laboratories excels.
Healthcare is often viewed as a defensive sector, primarily because people will prioritize essential medical treatments and life-saving procedures over other commodities and services. Abbott has established itself as a leader in several fast-growing healthcare sectors, including diabetes, diagnostics, cardiovascular care, and nutrition.
The tremendous earnings power of Abbott's broad portfolio is evident in its growth profile. Despite a dip in revenue from the company's diagnostic segment due to reduced demand following the end of the pandemic, Wall Street analysts still forecast that this healthcare behemoth will achieve a top-line growth of more than 11% in 2024 and 2025.
The bottom-line projections are even more optimistic, with an anticipated 15% increase in earnings per share over the same time frame. This double-digit top-line and bottom-line growth is a testament to Abbott's core value proposition as a leader in several high-value healthcare markets.
However, there's an important caveat to this story. It appears that most of this growth has already been factored into the stock's current price.
For instance, Abbott's shares are currently trading at over 36 times earnings. By comparison, the average price-to-earnings (P/E) ratio among tier 1 dividend growth stocks (those with at least 10 years of regular dividend increases) stands at 26.2.
Even among its specific group of companies with double-digit dividend growth rates over the past five years, Abbott's stock still seems expensive. This group currently has a price-to-earnings ratio (P/E) of 29.
Lastly, the benchmark S&P 500's P/E ratio is currently under 24. Therefore, despite Abbott's strong revenue, earnings, and dividend growth profile, its stock seems to be somewhat overvalued at current levels.
Verdict
There's no denying that Abbott Laboratories is a premier dividend payer. Its array of healthcare products, which are positioned defensively, gives it a distinct advantage, especially in the face of a potential economic downturn.
However, it may be prudent to hold off on purchasing shares until the stock experiences a pullback. Currently, Abbott's stock seems to be overpriced when compared to the wider market and its counterparts among tier 1 dividend growth stocks.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool has a disclosure policy.
