In our Investment Comments from May of 2011 we asked, “With so much bad news going around, how could it be that the S&P 500 advanced 5.9% in the first quarter of 2011, its best first quarter since 1998?” This year one might ask, “With so little having changed since we wrote those words a year ago, why did the market go so wild during the rest of 2011?”
The end of the first quarter set the high water mark for the S&P in 2011. The market would fall 21% from its highs, bottoming in October before a sharp rally helped the average end 2011 effectively unchanged. So far, 2012 looks like a potential repeat, but amplified. A 12.6% first quarter rally, again the S&P’s best performance since 1998, has the market reclaiming levels last achieved in 2007.
Cheap money and lower interest rates help explain how averages can rise sharply in spite of spotty economic progress. Spot gold, priced in U.S. dollars, is up more than the market during the past 12 months, while silver—whose price is more sensitive to broader economic performance—has lagged both gold and the S&P. Yields on 10-year and 30-year U.S. treasuries are both down more than 1% from already low levels. All else equal, we would expect lower interest rates to push investors on the margin out of bonds and into stocks. It makes intuitive sense that a disproportionate share of those marginal investor dollars would find their way into dividend-paying stocks. Indeed, indexes of dividend payers graphed against the S&P 500 over the last year will corroborate that intuition. Dividend stocks have indeed outperformed.
The Investor Advisory Service tends to look at dividends a little sidelong. All else equal, bigger dividends are better, but when a company becomes mature enough that the most valuable use of its cash flow is to support a generous dividend, the best years of growth, and the stock’s best years of gains, are typically over. Exceptions exist, however, and while our investment philosophy skews toward growth instead of dividend yield, we also try to present our readers with a diverse set of opportunities. Abbott Laboratories (Ticker: ABT) is a company we began following in 1983 as an upstart growth stock. After nearly thirty years in the newsletter, however, we’ve turned to dividends as much as growth as the basis for liking the stock. Yielding 3.8% based on a share price of $50.49 this time last year, ABT was (and still is) one of the higher-yielding stocks in the IAS.
Our timing was good. Shares advanced 6% despite a soggy market, thanks to 17% sales growth in Q1. Q2 growth came in at 9%, but that was good enough to keep shares right around their price at the time we wrote our profile, while the broader market went into the doldrums. Blue chip value stocks typically decline less than the market in times of turmoil. While they typically don’t keep up during rallies, ABT shares have mostly kept pace since the market’s 2001 lows. Investors reacted positively to Q3 news that the company will split its branded pharmaceutical division off into a separate company. Details regarding the split are still trickling out, and we will probably have more to say about the shares fairly soon. At a recent price of $61.10, plus $1.92 in dividends, shares are up 25% over the past year, well ahead of the S&P 500’s total gain of about 8%-9% during the same period.
As one final point of interest, with President Obama’s centerpiece health care legislation now in front of the Supreme Court, it’s funny to look back at our inaugural Abbott Labs write-up from way back in June 1983. Introducing the company to our readers, we opened with the lines “It appears that public and political pressure to reduce health care costs will continue both in the U.S. and abroad. The companies in the best position to respond to this changing environment are those with broadly diversified product lines and the type of products that make the health care system itself more productive.” Now almost thirty years later, we still haven’t gotten around to reining in healthcare costs.
In March 1994 we said, “Political risk is among the most uncertain of all the categories of risk. Price controls could wreck any company’s business plans. However, with every day that goes on, the likelihood seems greater that the result out of Washington will be some sort of compromise, a modified or gradual approach rather than a nationalizing of health industry.” That was almost twenty years ago. Now, with the fate of Obamacare in limbo and a big election coming up in seven short months, we can only look back at thirty years of health care debate and quote the old adage, “The more things change, the more they stay the same.”
Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.