Abbott (ABT) is a dividend aristocrat with excellent long-term growth potential. The company maintains a diversified mix of healthcare products that are sold around the world. Many of these products are recession-resistant and will enjoy more demand as consumer wealth increases in emerging markets, where ABT generates about half of its total sales.

The company’s dividend is extremely safe and appears to offer upper single-digit growth potential going forward. These are the types of companies we love to own in our Top 20 Dividend Stocks portfolio when they trade at a fair price. Let’s take a closer look at the business.

Business Overview

ABT has been in business for more than 125 years. The company spun off its research-based pharmaceuticals business (AbbVie) in the beginning of 2013, leaving it with four diversified healthcare segments – nutritionals (34% of sales through Q3), generic drugs (19%), medical devices (25%), and diagnostics (23%). About half of the company’s sales are made directly to consumers and patients, and the company sells over 10,000 different products.

By geography, over 70% of ABT’s revenue is derived outside of the U.S., and about 50% of total sales come from emerging markets.

Business Analysis

Each of ABT’s businesses has some unique competitive advantages. Around half of the company’s sales are made directly to consumers and patients. These products primarily reside in the company’s adult and pediatric nutrition segment and its branded generic drugs.

In some ways, these businesses are more like consumer packaged goods companies than traditional healthcare businesses. Their market positions benefit from decades of marketing campaigns to build up brand equity, research expenses to meet consumer tastes, and distribution relationships to maintain valuable shelf space.

With over 125 years of business history, ABT has built up leadership positions in many of these markets. The company is the global leader in adult nutrition and has the number one spot in U.S. pediatric nutrition. In total, the nutrition segment has 50 consumer brands and is #1 or #2 in 25 countries. Within branded generics, ABT holds top market positions in India, Russia, and several Latin American countries.

ABT’s medical devices and diagnostics businesses are a bit faster-moving, requiring constant R&D investments to generate profitable sales growth. Once again, however, ABT holds leading market share positions in several key categories – LASIK, cataract surgery, amino-acid diagnostics, blood screening, and more.

Breaking into these markets is a challenge for new entrants for several reasons. Some markets are heavily regulated by the government (e.g. medical devices, pharmaceuticals, nutritional products), require high investment costs (ABT invests 6-7% of sales in R&D, or about $1.3 billion last year), need global distribution, and face patent or trademark protection.

In addition to relatively high barriers to entry, ABT plays in markets where growth in healthcare has high demand. Consumers in emerging markets (50% of ABT’s sales) often pay out-of-pocket for medicine and can’t afford expensive brands, creating significant opportunity for ABT’s branded generics. As spending on healthcare in emerging markets continues to rise with economic growth, almost all of ABT’s product lines should benefit.