# Abbott Laboratories (ABT) | Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

## Intrinsic Stock Value (Valuation Summery)

Abbott Laboratories, dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 5.62%
0 DPS01 2.01
1 DPS1 2.24 = 2.01 × (1 + 11.34%) 2.12
2 DPS2 2.43 = 2.24 × (1 + 8.58%) 2.18
3 DPS3 2.57 = 2.43 × (1 + 5.81%) 2.18
4 DPS4 2.65 = 2.57 × (1 + 3.05%) 2.13
5 DPS5 2.66 = 2.65 × (1 + 0.29%) 2.02
5 Terminal value (TV5) 49.99 = 2.66 × (1 + 0.29%) ÷ (5.62% – 0.29%) 38.02
Intrinsic value of 's common stock (per share) \$48.65
Current share price \$37.81

1 DPS0 = Sum of last year dividends per share of 's common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

## Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.78% Expected rate of return on market portfolio2 E(RM) 13.09% Systematic risk (β) of 's common stock βABT 0.28 Required rate of return on 's common stock3 rABT 5.62%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rABT = RF + βABT [E(RM) – RF]
= 2.78% + 0.28 [13.09% – 2.78%]
= 5.62%

## Dividend Growth Rate (g)

### Dividend growth rate (g) implied by PRAT model

Abbott Laboratories, PRAT model

Average Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in thousands)
Cash dividends declared on common shares   2,649,866  3,011,631  2,731,584  2,476,036  2,228,776
Net earnings   5,962,920  4,728,449  4,626,172  5,745,838  4,880,719
Net sales   39,873,910  38,851,259  35,166,721  30,764,707  29,527,552
Total assets   67,234,944  60,276,893  59,462,266  52,416,623  42,419,204
Total Abbott shareholders' investment   26,720,961  24,439,833  22,388,135  22,855,627  17,479,551
Ratios
Retention rate1   0.56 0.36 0.41 0.57 0.54
Profit margin2   14.95% 12.17% 13.15% 18.68% 16.53%
Asset turnover3   0.59 0.64 0.59 0.59 0.70
Financial leverage4   2.52 2.47 2.66 2.29 2.43
Averages
Retention rate 0.49
Profit margin 15.10%
Asset turnover 0.62
Financial leverage 2.47

Dividend growth rate (g)5 11.34%

2012 Calculations

1 Retention rate = (Net earnings – Cash dividends declared on common shares) ÷ Net earnings
= (5,962,920 – 2,649,866) ÷ 5,962,920 = 0.56

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 5,962,920 ÷ 39,873,910 = 14.95%

3 Asset turnover = Net sales ÷ Total assets
= 39,873,910 ÷ 67,234,944 = 0.59

4 Financial leverage = Total assets ÷ Total Abbott shareholders' investment
= 67,234,944 ÷ 26,720,961 = 2.52

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.49 × 15.10% × 0.62 × 2.47 = 11.34%

### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$37.81 × 5.62% – \$2.01) ÷ (\$37.81 + \$2.01) = 0.29%

where:
P0 = current price of share of 's common stock
D0 = last year dividends per share of 's common stock
r = required rate of return on 's common stock

### Dividend growth rate (g) forecast

Abbott Laboratories, H-model

Year Value gt
1 g1 11.34%
2 g2 8.58%
3 g3 5.81%
4 g4 3.05%
5 and thereafter g5 0.29%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 11.34% + (0.29% – 11.34%) × (2 – 1) ÷ (5 – 1) = 8.58%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.34% + (0.29% – 11.34%) × (3 – 1) ÷ (5 – 1) = 5.81%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.34% + (0.29% – 11.34%) × (4 – 1) ÷ (5 – 1) = 3.05%