Better Buy: Abbott Laboratories vs. DexCom

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Abbott Laboratories (NYSE: ABT) and DexCom (NASDAQ: DXCM) turned in stellar performances in 2018. Abbott's shares jumped 27%, while DexCom stock more than doubled. It's a different story so far this year, though. Both medical device stocks lag well behind the S&P 500.

Investors shouldn't give up on either of these stocks because they've underperformed over a short period. Both Abbott and DexCom should have solid long-term growth prospects. But which stock is the better pick right now? Here's how Abbott and DexCom compare in three key areas.

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Growth prospects

DexCom is the hands-down winner when it comes to recent growth rates. The company's revenue soared 52% year over year to $280.5 million in the first quarter of 2019. That makes Abbott's Q1 revenue growth of 2% look puny by comparison.

Wall Street definitely views DexCom as having better growth prospects. Analysts project average annual earnings growth of 140% over the next five years compared to growth of close to 12% for Abbott during the same period.

It's important to note, though, that Abbott's product lineup is much more diversified than DexCom's. Abbott claims four multibillion-dollar business segments: diagnostics, established pharmaceuticals, medical devices, and nutrition. Each of these segments markets a wide lineup of products. DexCom makes nearly all of its money from its G6 continuous glucose monitoring (CGM) system.

DexCom's reliance on the G6 system arguably makes its growth prospects riskier than Abbott's. Spruce Point Capital Management analyst Ben Axler thinks that DexCom's growth could be in trouble when Abbott launches its second-generation Freestyle Libre CGM system. Although the G6 system will still offer more features than the new Freestyle Libre, Abbott is expected to price its system around 80% below the G6 price.

On the other hand, Freestyle Libre should continue to fuel growth for Abbott. The big healthcare company should also benefit from several other new products, including its HeartMate 3 left ventricular assist device. It should also see higher sales from MitraClip's new indication in treating secondary mitral regurgitation, a leaky heart valve resulting from advanced heart failure.

Dividends

There's no contest as to which stock has the better dividend, because DexCom doesn't pay a dividend while Abbott does.

Abbott's dividend yield currently stands at a respectable 1.61%. What's more impressive is the company's commitment to its dividend program. Abbott recently declared its 381st consecutive quarterly dividend. The company is a member of the elite group known as Dividend Aristocrats and has increased its dividend payout for 47 years in a row.

Valuation

Neither of these stocks looks cheap right now. Abbott Labs' shares trade at 21 times expected earnings. But DexCom's forward earnings multiple of 101 would probably be viewed by most investors as astronomical.

However, we do need to factor growth prospects into the valuations of these stocks. Remember that Wall Street has much loftier expectations for DexCom's growth than it does for Abbott. As a result, DexCom's price-to-earnings-to-growth (PEG) ratio of 1.1 makes its stock appear to be more attractively valued than Abbott, which has a PEG ratio nearly twice as high.

Better buy

I like both of these stocks. Which is the better pick? I hate to equivocate, but that's what I'm going to do.

Abbott Labs is by far the better choice for conservative investors. The company is about as steady as they come. It pays a great dividend. And Abbott has solid long-term growth prospects.

If you're looking for more aggressive growth, though, DexCom will probably be a better fit. Although it's possible that Abbott's new Freestyle Libre CGM could hamper growth for DexCom's G6, I think the market is big enough for both products. I'm also bullish about DexCom's long-term prospects with its more advanced (and less expensive) G7 system likely on the way by late next year.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.