AbbVie Inc. (ABBV) discovers, develops, manufactures and sells pharmaceutical products worldwide. The company was founded in 2013 when Abbott Laboratories split into two companies – Abbvie and Abbott. Abbvie raised dividends to shareholders for five years since becoming an independent public company. The company is a dividend aristocrat with a 48-year track record of increasing annual dividends.
GAAP earnings per share have been largely unchanged since 2013. However, the company provides a reconciliation between GAAP and non-GAAP results. Non-GAAP earnings increased.
Abbvie, however, expects GAAP-adjusted earnings per share of $ 10.47- $ 10.49 / share in 2020. Based on those forward earnings, the stock looks attractively valued today.
Abbvie’s downside is that the company makes 40% of its sales and a larger portion of its profits from a rheumatoid arthritis drug called Humira. The drug’s patent expired in the US in 2016 and in the European Union in 2018. Due to the fact that the drug is biologically similar, Abbvie says there are over 70 patents that will provide some intellectual property protection by sometime in 2022.
Humira’s sales have grown rapidly and are likely to continue to grow sharply until competitors catch up. It is possible that sales can continue to grow at a healthy pace through 2022. After that, they will decline as competitors nibble on Humira’s market share. If the market it serves grows or there are new uses for the drug, it is possible that sales may actually be sustained even if we have increased competition.
I don’t like the high level of trust in a single product because it lowers the margin of safety. I also don’t like that this product is sure to face increased competition in the years to come. The third fact I don’t like is that I don’t see another blockbuster drug that will replace Humira’s sales after 2022. Although there are many compounds at various stages of clinical trials, several new drugs would be needed to compensate for the eventual loss of Humira sales.
As a dividend investor, I need growing profits to generate growing dividend income. If the current business model cannot be predicted for the future, it may mean the company may not be the kind of buy-and-hold investment that can be safely incorporated into your portfolio. May need more monitoring.
On the flip side, others might argue that these headwinds are already priced into stocks. Despite the troubles expected in the 2020s, investors will be fine in the meantime and get high dividend income.
Abbvie acquired the biotech company Allergan in un 2020 in a $ 60 billion transaction that was paid for in cash and shares. This deal will allow Abbvie to diversify its revenue streams away from the blockbuster drug Humira, which makes up a huge chunk of its revenue and revenue. Humira will lose its exclusivity in the USA after 2023. This deal will also bring synergies and new drugs at various stages of development. The synergies result mainly from a reduction in the duplication of SG&A costs, R&D and the consolidation of production processes. The purchase price is roughly half what Allergan was when Pfizer went out of business to acquire it a few years ago. This will reduce Humira income from 60% to 40%. This cash flow analysis does not take into account the cost savings achieved by eliminating duplicate functions in corporate departments, research and development, and manufacturing. However, increased interest expenses due to higher debts are also not taken into account.
After Abbott’s split in 2013, the company made many share buybacks. However, following the completion of the Allergan acquisition, the number of shares in 2020 reached 1.673 billion.
Annual dividend per share rose from $ 1.60 / share in 2013 to $ 4.72 / share in 2020. Back in October 2020, the company increased its quarterly dividend by 10.20% to $ 1.30 / share. This brings the annual dividend to $ 5.20 / share.
The dividend appears to be adequately covered based on future earnings for 2020. The payout ratio is 57%. However, if earnings per share falls off a cliff in the next decade when Humira sales plummet, dividends may be in dangerous territory sometime in the second half of the next decade.
I find Abbvie is attractively valued today, with 9.08x futures earnings and a yield of 4.57%. While the future is unclear where future sales growth will be seen after Humira, the stock can still generate solid returns in the short term. The integration with Allergan could create synergies, diversification and a much-needed boost for the future pipeline. This is at the expense of the integration risk and the higher debt. Some may argue that the stock’s future uncertainty is already somewhat priced in. Even so, the stock could still provide good entry points for bad news. Given the recent seal of approval from none other than the Oracle of Omaha, I’ve decided to start a position in the stock for the newsletter.
Abbvie is a company in need of closer monitoring as it is not the type of business where future growth can be taken for granted. On the other hand, the dividend currently appears to be sustainable and is expected to grow in the high single digits over the next four to five years. Investors today have to decide for themselves whether the current valuation is attractive enough to outweigh future risks. Either way, investors are paid generously to hold their Abbvie stock.