Published on October 12th, 2022 by Josh Arnold
We believe long-term investors should focus on the highest-quality dividend growth stocks. These are companies with long histories of raising their dividends, and durable competitive advantages to fuel continued dividend growth.
Therefore, we tend to steer investors toward the Dividend Kings, a group of just 45 stocks with at least 50 years of dividend increases.
You can also download an Excel spreadsheet with the full list of all 45 Dividend Kings (plus important metrics such as price-to-earnings ratios and dividend yields) by clicking on the link below:
We review each of the Dividend Kings 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 facing its flagship product Humira, and the impending patent expiration that drug is facing across the globe. However, the company has a plan to continue growing even after Humira loses its patent protection.
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 began trading as an independent company in 2013, after it was spun off from fellow pharmaceutical Dividend King, Abbott Laboratories (ABT).
AbbVie has generated strong growth since the spin-off. According to AbbVie, it grew revenue and adjusted EPS growth by 14.7% and 19% respectively, each year from 2013-2021.
Today, AbbVie focuses on one main business segment—pharmaceuticals. It focuses on a few key treatment areas, including immunology, hematologic oncology, neuroscience, and more.
Source: Investor Presentation
The company has seen excellent growth since it was spun off from Abbott. AbbVie now generates annual revenue of about $59 billion.
Since the spin-off from Abbott, AbbVie has produced excellent growth, due in large part to Humira. Humira is a multi-purpose drug, and is the most successful drug of all-time. The challenge for AbbVie is that Humira is now facing biosimilar competition in Europe, and will lose patent protection in the U.S. in 2023. That means revenue for Humira is declining, and will plummet when all patent protections are gone.
Even so, AbbVie remains a giant in the healthcare sector, with a large and diversified product portfolio.
AbbVie reported second quarter earnings on July 29th, 2022, and results were slightly weaker than expected. Revenue was $14.6 billion, up 4% year-over-year, driven by Skyrizi and Rinvoq. Earnings-per-share came to $3.37, which was up 11% year-over-year, and better than expected. Management guided for $13.78 to $13.98 in earnings-per-share for the full year, and we’ve taken the midpoint of $13.88 as our estimate.
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 modest 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, Rinvoq and Skyrizi are two key 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. The company sees its aesthetics revenue growing at a high-single digit rate on a percentage basis, reaching $9 billion in annual sales in 2029.
Share buybacks will also add to AbbVie’s future earnings growth. These reduce the number of shares to which earnings are allocated, meaning that on a per-share basis, earnings rise, even if earnings in dollars do not.
Since the company is highly profitable and generates significant free cash flow, it can afford to both invest in growth and also return cash to shareholders.
In all, we expect 2.5% EPS growth for AbbVie, reflecting the steep patent cliff facing Humira. We believe the growth outlook will improve when the Humira overhang is gone, but for now, there is some uncertainty surrounding AbbVie’s ability to overcome that with new products.
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 develop new drugs and therapies, when one of their blockbusters loses patent protection.
Research and development expense is nearly $7 billion per year. AbbVie has multiple growth opportunities to replace Humira, particularly in the therapeutic areas of immunology, hematology, and neuroscience.
The result of its significant investment in R&D is a well-stocked pipeline.
Source: Investor Presentation
AbbVie was not a standalone company during the last financial crisis, so there is no recession track record. However, the fact remains that 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 ~41% for 2022.
Valuation & Expected Returns
AbbVie is expected to generate adjusted EPS of $13.88 for 2022, at the midpoint of guidance. At this EPS level, the stock is currently trading for a price-to-earnings ratio of 10.2. Our fair value estimate for AbbVie is a price-to-earnings ratio of 10.0, meaning the stock is essentially fairly valued today. A declining P/E multiple could reduce shareholder returns by approximately 0.4% per year over the next 5 years.
In addition, we expect annual earnings growth of 2.5% through 2026.
Lastly, the stock has a current dividend yield of 4.0%. Given these inputs, we expect annual returns of 6.1% 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 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. This is why we have fairly low assumptions for the company’s future EPS growth and fair value P/E multiple.
Still, the company has built a large portfolio of new products that should keep its growth intact. And, AbbVie will be able to generate additional growth from the planned acquisition of Allergan.
We believe AbbVie is a strong holding for long-term value investors and income investors.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.