Abbott Laboratories (NYSE:ABT) stock rose steadily in the last year and is up around 20% in that time. Though shares hover near yearly highs, thanks to a quick bounce from $66 to $71.42 recently, biotech investors should still consider investing in this company. Last quarter’s strong results, plus a recent dividend hike, signal a healthy 2019 year for this medical appliance and equipment firm.

Abbott Laboratories will report Q4 results on Jan. 23 that will likely repeat Q3 2018 results, which were posted last October. The firm reported sales of $7.7 billion, up 7.8% on an organic basis. Since divesting its Abbott Medical Optics (“AMO”) and integrating St. Jude Medical vascular business, it is more focused on heart and diabetic machines. Diagnostics, medical devices, nutrition, and established pharmaceuticals all grew in the healthy single digits.

Full-Year 2018 Forecast for ABT Stock

Abbott forecast earnings of $2.87 to $2.89 (adjusted), reflecting growth of 15%. It owes its growth to developments in its medical devices. For example, the U.S. approved the FreeStyle Libre 14-day system, so sales should start adding to results. FreeStyle Libre 2 system and High Sensitive Troponin, available in Europe, will bring healthy geographic diversification to its revenue.

On Dec. 16, 2018, Abbott declared a 32-cent a share quarterly dividend. This increase from 28-cents a share, or up 14.3%, gives investors a forward yield of 1.8%. This is below that of Bristol-Myers Squibb (NYSE:BMY), at 3.27%, Merck & Co. (NYSE:MRK), at 2.9%, or Pfizer (NYSE:PFE), at 3.39%. Medtronic (NYSE:MDT) has a comparable dividend yield of 2.29%. Despite dividend yields below that of comparable medical firms, this is still a bullish signal.

Management is demonstrating its confidence in future cash flow growth and rewarding shareholders with income. Plus, the firm pays a higher dividend yield than the bottom 25% of dividend payers in the U.S. (according to simplywall.st).

Abbott Balance Sheet Analysis

Abbott’s net worth increased in 2017 to $31.5 billion, but debt also rose, too, to $23.8 billion. This is due to the St. Jude Medical acquisition.

Markets do not seem to care about the higher debt because its long term, the debt/equity ratio is only 0.62X, according to MacroTrends. In the drug space, Bausch Health Companies (NYSE:BHC) has a debt/equity of nearly 8x while Mylan N.V. (NASDAQ:MYL) is at 1.2X.

The point here is that Abbot can handle the debt due to its healthy debt coverage. Its Operating cash flow of 26% exceeds its over 20% of total debt. Interest payment on the debt is covered by 4.8 times its EBIT.

Abbott Laboratories debt levels increased from merger and acquisition activities. (Source: https://simplywall.st)

Outlook for ABT Stock

Synergies from the integration of Abbott’s St Jude unit will save on costs. Because management puts an emphasis on improving its underlying gross margin, look for the unit to keep performing better and adding more to profits.

The Alere unit, which will bring in $2 billion in revenue for fiscal 2018, will add positively to profits. Last year, Abbott stabilized and integrated the business. With that activity complete, it may concentrate on growing the business. As it happened that the strong flu season will benefit results, sustaining growth will depend on new product introductions from the unit.

Based on the six analysts covering ABT stock, the average price target is $79.33, representing upside of 11%. Investors may build a bearish to neutral 10-year DCF Revenue Exit model that assumes revenue slowing in the single digits. Even in that scenario, the model from finbox.io would still suggest a fair value of $73, not far from the recent stock price of ABT.

Abbott put a priority on its dividends over debt repayment. Its businesses are growing steadily and the product list is getting bigger. Cash flow growth will let the company meet its dividend payment obligations while paring debt levels over the long-term.

ABT stock is suitable for income investors who want to own a growing medical appliances firm at a reasonable price.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.