# Abbott Laboratories (NYSE:ABT)

## Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

Abbott Laboratories, free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.29%
01 FCFE0 2,899
1 FCFE1 2,785  = 2,899 × (1 + -3.94%) 2,458
2 FCFE2 2,782  = 2,785 × (1 + -0.11%) 2,167
3 FCFE3 2,885  = 2,782 × (1 + 3.73%) 1,985
4 FCFE4 3,104  = 2,885 × (1 + 7.56%) 1,884
5 FCFE5 3,458  = 3,104 × (1 + 11.40%) 1,853
5 Terminal value (TV5) 204,064  = 3,458 × (1 + 11.40%) ÷ (13.29%11.40%) 109,357
Intrinsic value of Abbott Laboratories’s common stock 119,704

Intrinsic value of Abbott Laboratories’s common stock (per share) \$67.67
Current share price \$96.73

Based on: 10-K (filing date: 2020-02-21).

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 1.17% Expected rate of return on market portfolio2 E(RM) 11.87% Systematic risk of Abbott Laboratories’s common stock βABT 1.13 Required rate of return on Abbott Laboratories’s common stock3 rABT 13.29%

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).

3 rABT = RF + βABT [E(RM) – RF]
= 1.17% + 1.13 [11.87%1.17%]
= 13.29%

### FCFE Growth Rate (g)

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

Abbott Laboratories, PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Cash dividends declared on common shares 2,343  2,047  1,947  1,547  1,464
Net earnings 3,687  2,368  477  1,400  4,423
Net sales 31,904  30,578  27,390  20,853  20,405
Total assets 67,887  67,173  76,250  52,666  41,247
Total Abbott shareholders’ investment 31,088  30,524  30,897  20,538  21,211
Financial Ratios
Retention rate1 0.36 0.14 -3.08 -0.11 0.67
Profit margin2 11.56% 7.74% 1.74% 6.71% 21.68%
Asset turnover3 0.47 0.46 0.36 0.40 0.49
Financial leverage4 2.18 2.20 2.47 2.56 1.94
Averages
Retention rate -0.40
Profit margin 9.89%
Asset turnover 0.44
Financial leverage 2.27

FCFE growth rate (g)5 -3.94%

Based on: 10-K (filing date: 2020-02-21), 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-17), 10-K (filing date: 2016-02-19).

2019 Calculations

1 Retention rate = (Net earnings – Cash dividends declared on common shares) ÷ Net earnings
= (3,6872,343) ÷ 3,687 = 0.36

2 Profit margin = 100 × Net earnings ÷ Net sales
= 100 × 3,687 ÷ 31,904 = 11.56%

3 Asset turnover = Net sales ÷ Total assets
= 31,904 ÷ 67,887 = 0.47

4 Financial leverage = Total assets ÷ Total Abbott shareholders’ investment
= 67,887 ÷ 31,088 = 2.18

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.40 × 9.89% × 0.44 × 2.27 = -3.94%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (171,100 × 13.29%2,899) ÷ (171,100 + 2,899) = 11.40%

where:
Equity market value0 = current market value of Abbott Laboratories’s common stock (US\$ in millions)
FCFE0 = the last year Abbott Laboratories’s free cash flow to equity (US\$ in millions)
r = required rate of return on Abbott Laboratories’s common stock

#### FCFE growth rate (g) forecast

Abbott Laboratories, H-model

Year Value gt
1 g1 -3.94%
2 g2 -0.11%
3 g3 3.73%
4 g4 7.56%
5 and thereafter g5 11.40%

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

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -3.94% + (11.40%-3.94%) × (2 – 1) ÷ (5 – 1) = -0.11%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -3.94% + (11.40%-3.94%) × (3 – 1) ÷ (5 – 1) = 3.73%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -3.94% + (11.40%-3.94%) × (4 – 1) ÷ (5 – 1) = 7.56%