Updated on February 1st, 2023 by Jonathan Weber
At Sure Dividend, we believe long-term investors should focus on the highest-quality dividend growth stocks. Broadly speaking, these are companies with long histories of raising their dividends, and the competitive advantages and growth potential to fuel continued dividend growth in the years ahead.
Therefore, we tend to steer investors toward the Dividend Aristocrats, a group of 68 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. We have compiled a complete list of all Dividend Aristocrats, along with relevant financial metrics such as dividend yields and price-to-earnings ratios.
You can download your free list of all the Dividend Aristocrats by clicking on the link below:
We review each of the 68 Dividend Aristocrats every year. The next stock to be reviewed in this year’s edition is AbbVie (ABBV).
AbbVie is coming off a multi-year period of excellent growth, thanks to the massive success of its flagship product Humira. There are questions regarding the company’s future growth due to increasing competition for Humira in the U.S. and Europe, but the company has an ambitious plan to continue its growth in the long run.
This article will discuss AbbVie’s business model, growth potential, and why we rate the stock as a hold for dividend growth investors.
AbbVie is a global pharmaceutical giant. It has a $260 billion market capitalization, meaning it is a mega-cap stock.
AbbVie began trading as an independent company in 2013, after it was spun off from fellow pharmaceutical Dividend Aristocrat, Abbott Laboratories (ABT).
AbbVie has generated strong growth since the spin-off. Thanks to success with drugs such as Humira, the company grew revenue and adjusted EPS by 14% and 18%, respectively, in the 2013 to 2022 time frame (using the midpoint of management’s guidance for 2022, as Q4 results have not been reported yet).
Additional Resource: Stock Spin-Off Calendar from Stock Spin-Off Investing.
AbbVie is a pharmaceutical products company that is focused on a couple of key treatment areas, including immunology, oncology, and neurological health
Source: Investor Presentation
Thanks to the growth it experienced since it was spun off, AbbVie now generates annual revenue of around $58 billion.
AbbVie’s most important product is Humira. Humira is an immunology drug that is used for the treatment of rheumatoid arthritis, Crohn’s disease, and several additional indications, and that has been the top-selling drug in the world for a couple of years. The challenge for AbbVie is that Humira is now facing biosimilar competition in Europe and the US (since January 2023), which is why Humira’s revenue contribution will decline in 2023 and beyond.
AbbVie reported its third-quarter earnings results on October 28, 2022. Quarterly revenue of $14.8 billion increased 3% year-over-year, which was primarily the result of growth from new drugs such as Skyrizi and Rinvoq, which treat the same indications Humira treats, and which are seen as an internal replacement of Humira’s revenue in the long run. Earnings-per-share increased 29% for the third quarter.
The company guides for adjusted EPS to fall into a range of $13.76 to $13.96 in 2022 — since Q4 results have not yet been released, we use this as a base case assumption for that year’s profits. At the midpoint of company guidance, adjusted EPS would be up 9% year over year.
The major risk for global pharmaceutical manufacturers is patent loss. When a particular drug loses its patent, the market is typically flooded with competition, especially for the world’s top-selling products.
For AbbVie, its biggest risk is the competition about to hit its flagship drug Humira, a multi-purpose drug that is used to treat rheumatoid arthritis, plaque psoriasis, Crohn’s disease, ulcerative colitis, and more.
Humira at one point generated over half of AbbVie’s annual sales. Loss of patent exclusivity in the US in early 2023 is a significant overhang. AbbVie expects its total sales will decline in 2023 as a result — revenues are seen declining by around 7% this year. At the same time, AbbVie expects to return to sales growth in 2024 on the back of strength from other portfolio assets.
Fortunately, the company prepared for the loss of patent exclusivity on Humira, by investing heavily in new products as well as acquisitions to boost its growth. For example, AbbVie has seen strong growth from two of its oncology drugs, Imbruvica and Venclexta.
Rinvoq and Skyrizi are two additional products that represent long-term growth catalysts. These immunology drugs are used to treat similar indications relative to Humira, but promise better efficiency and fewer side effects:
Source: Investor Presentation
AbbVie has guided for combined revenues of more than $21 billion from Rinvoq and Skyrizi a couple of years from now, which would make them bigger than Humira at its peak.
AbbVie’s $63 billion acquisition of Allergan also remains a source of future business and earnings growth. Allergan’s flagship product is Botox, which diversifies AbbVie’s portfolio with exposure to global aesthetics and neurological indications. Both of these markets continue to experience growth, thereby allowing AbbVie to benefit from growing spending in these areas.
Debt reduction and share repurchases are other drivers that could impact AbbVie’s earnings-per-share positively in the long run. But due to the near-term headwinds from the Humira patent loss, we believe that earnings-per-share growth could be somewhat subdued, in the 3% range, over the coming five years.
Competitive Advantages & Recession Performance
The most important competitive advantage for AbbVie, and any other pharmaceutical company, is its patent portfolio. Pharmaceutical giants need to spend heavily to innovate new drugs and therapies when one of their blockbusters loses patent protection.
Research and development expenses totaled more than $7 billion annually in recent years, not yet including AbbVie’s acquisitions of additional pipeline assets from other companies. Thanks to that heavy spending on new therapies, AbbVie is well-positioned in growth markets such as oncology and immunology.
AbbVie was not a standalone company during the last financial crisis, so there is no recession track record, but since sick people require treatment whether the economy is strong or not, it is highly likely that AbbVie would continue to perform well during a recession. The COVID pandemic has not impacted AbbVie negatively, as the company hit new record profits in 2020, 2021, and 2022.
Even if AbbVie’s earnings were to decline slightly in a recession, the dividend should remain secure. AbbVie’s trailing dividend payout ratio is just 43%, after all.
Valuation & Expected Returns
AbbVie is expected to have generated adjusted EPS of $13.86 for 2022, at the midpoint of guidance. At this EPS level, the stock is currently trading for a price-to-earnings ratio of 10.5.
AbbVie is valued considerably below the S&P 500 Index. In addition, AbbVie is undervalued today when compared to its historical average PE of around 12. Our fair value estimate for AbbVie is a price-to-earnings ratio of 10.0, due to increasing leverage from the Allergan acquisition and the Humira patent exclusivity that expired in the U.S. in January, which will most likely lead to lower sales this year.
We thus view AbbVie as slightly overvalued. A compressing P/E multiple could decrease shareholder returns by approximately 1% per year over the next 5 years.
In addition, we expect annual earnings growth of 3% through the next five years. Lastly, the stock has a current dividend yield of 4.1%. In total, we expect annual returns of around 6% per year over the next five years, making AbbVie stock a hold.
AbbVie is a very high-quality business, with a strong pharmaceutical pipeline and long-term growth potential. It is also a shareholder-friendly company that returns excess cash flow to investors.
AbbVie faces a significant challenge in replacing lost Humira sales as it faces competition in the U.S. and Europe. Fortunately, the company has prepared for this with heavy R&D investments. From this, it has created a large portfolio of new products that should allow AbbVie to start to grow again in 2024 and beyond once the Humira patent expiration has been lapped.
With expected returns of 6% per year going forward, including a 4.1% dividend yield, we believe AbbVie is a hold for long-term value investors and income investors.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: