Updated on April 23rd, 2021 by Bob Ciura
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 65 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 65 Dividend Aristocrats by clicking on the link below:
We review each of the 65 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 to Humira in the U.S. and Europe, but the company has a plan to continue its impressive growth.
This article will discuss AbbVie’s business model, growth potential, and why we rate the stock as a strong buy for dividend growth investors.
AbbVie is a global pharmaceutical giant. It has a $197 billion market capitalization, meaning it is on the cusp of becoming 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. According to AbbVie, it grew revenue and adjusted EPS growth by 13.5% and 18.8% respectively, each year from 2013-2020.
Additional Resource: Stock Spin-Off Calendar from Stock Spin-Off Investing.
Today, AbbVie focuses on one main business segment—pharmaceuticals. It focuses on a few key treatment areas, including immunology, oncology, and women’s health. The company has seen excellent growth since it was spun off from Abbott. AbbVie now generates annual revenue above $45 billion.
Since the spin-off from Abbott, AbbVie has produced excellent growth, in large part due to its flagship product Humira. Humira is a multi-purpose drug, and had been the top-selling drug in the world. The challenge for AbbVie is that Humira is now facing biosimilar competition in Europe, which has had a noticeable impact on the company.
Humira will lose patent protection in the U.S. in 2023. Even so, AbbVie remains a giant in the healthcare sector, with a large and diversified product portfolio.
Source: Investor Presentation
AbbVie reported its fourth-quarter earnings results on February 3rd. Quarterly revenue of $13.9 billion increased 59% year-over-year, and was primarily due to the acquisition of Allergan. Earnings-per-share increased 32% for the fourth quarter. For the full year, revenue increased 38% while adjusted earnings-per-share increased 18% to $10.56.
The company issued strong guidance for 2021 which calls for adjusted earnings-per-share in a range of $12.32 to $12.52. At the midpoint of company guidance, adjusted EPS are expected to increase 18% for 2021.
Even with Humira’s U.S. patent exclusivity set to expire in two years, the company has a plan to continue generating long-term growth.
The major risk for global pharmaceutical manufacturers is patent loss. When a particular drug loses 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 a variety of conditions. Some of these include 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 is a significant overhang–AbbVie expects its total sales will decline in 2023 as a result. At the same time, AbbVie also expects to return to sales growth in 2024.
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 Imbruvica, which generated a 13.7% increase in sales for 2020.
Rinvoq and Skyrizi are two additional products that represent long-term growth catalysts.
Source: Investor Presentation
AbbVie also completed the $63 billion acquisition of Allergan. Allergan’s flagship product is Botox, which diversifies AbbVie’s portfolio with exposure to global aesthetics. In 2020, AbbVie’s aesthetics portfolio generated revenue of $2.59 billion.
Share buybacks will also add to AbbVie’s future earnings growth. Since the company is highly profitable and generates significant free cash flow, it can afford to invest in growth and also return cash to shareholders. In all, we expect 3% EPS growth for AbbVie, reflecting the steep patent cliff facing Humira.
Competitive Advantages & Recession Performance
The most important competitive advantage for AbbVie, and any 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 expense totaled $6.5 billion in 2020. AbbVie has multiple growth opportunities to replace Humira, particularly in the therapeutic areas of immunology, hematology, and neuroscience.
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.
AbbVie’s earnings are likely to decline somewhat in a recession, but the dividend should remain secure. AbbVie has a projected dividend payout ratio of 42% for 2021.
Valuation & Expected Returns
AbbVie is expected to generate adjusted EPS of $12.42 for 2021, at the midpoint of guidance. At this EPS level, the stock is currently trading for a price-to-earnings ratio of just 9.0.
AbbVie is valued considerably below the S&P 500 Index. In addition, AbbVie is undervalued today when compared to its historical average. Our fair value estimate for AbbVie is a price-to-earnings ratio of 10.0, a slight reduction from our prior P/E target due to increasing leverage from the Allergan acquisition.
Still, we view AbbVie as undervalued. An expanding P/E multiple could boost shareholder returns by approximately 2.1% per year over the next 5 years.
In addition, we expect annual earnings growth of 3% through 2026. Lastly, the stock has a current dividend yield of 4.7%. In total, we expect annual returns of 9.8% per year over the next five years, making AbbVie stock a buy.
AbbVie is a very high-quality business, with a strong pharmaceutical pipeline and growth potential. It is also a shareholder-friendly company that returns excess cash flow to investors through stock buybacks and dividends.
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 keep AbbVie’s growth intact. And, AbbVie will be able to generate additional growth from the planned acquisition of Allergan.
With expected returns of nearly 10% per year going forward, including a 4.7% yield, we believe AbbVie is a buy for long-term value investors and income investors.