Updated April 23, 2021 by Bob Ciura
At Sure Dividend, we believe long-term investors should focus on the stocks with the highest dividend growth. By and large, these are companies with a long history of raising dividends and having the competitive advantage and growth potential to drive further dividend growth in the years to come.
Hence, we tend to steer investors towards the Dividend Aristocrats, a group of 65 companies in the S&P 500 index with more than 25 consecutive years of dividend increases. We’ve put together a full list of all the Dividend Aristocrats along with relevant financial metrics like dividend yields and value for money.
You can download your free list of all 65 Dividend Aristocrats by clicking 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 has had a period of excellent growth for several years thanks to the massive success of its flagship product Humira. There are questions about the company’s future growth due to increased competition with Humira in the US and Europe, but the company plans to continue its impressive growth.
This article explains AbbVie’s business model, growth potential, and reasons why we rate the stock as a strong buy for investors with dividend growth.
AbbVie is a global pharmaceutical company. It has a market cap of $ 197 billion, which means it is about to become a mega-cap stock.
AbbVie began trading as an independent company in 2013 after being spun off from Abbott Laboratories (ABT), a colleague of the pharmaceutical dividend aristocracy.
AbbVie has seen strong growth since the spin-off. According to AbbVie, sales and Adjusted EPS growth increased 13.5% and 18.8% each year from 2013 to 2020, respectively.
Today AbbVie focuses on one core business area – 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 split off from Abbott. AbbVie now has annual sales of over $ 45 billion.
AbbVie has seen excellent growth since splitting off from Abbott, thanks in large part to its flagship product Humira. Humira is a multipurpose drug and was the top selling drug in the world. The challenge for AbbVie is that Humira is now facing biosimilar competition in Europe that has had a significant impact on the company.
Humira will lose patent protection in the United States in 2023. Even so, AbbVie remains a giant in the healthcare sector with a large and diversified product portfolio.
Source: Investor Presentation
AbbVie announced its fourth quarter results on February 3rd. Quarterly revenue of $ 13.9 billion was up 59% year over year, primarily driven by the Allergan acquisition. Earnings per share rose 32% in the fourth quarter. For the full year, revenue grew 38% while adjusted earnings per share rose 18% to $ 10.56.
The company issued strong guidance for 2021, calling for adjusted earnings per share in a range of $ 12.32 to $ 12.52. In the middle of the company’s forecast, Adjusted EPS is expected to increase 18% for 2021.
Even if Humira’s US patent exclusivity expires in two years, the company plans to continue generating long-term growth.
The greatest risk for global pharmaceutical manufacturers is patent loss. When a particular drug loses its patent, the market is usually inundated with competition, especially for the best-selling products in the world.
AbbVie’s biggest risk is competition from its flagship drug Humira, a multi-purpose drug that is used to treat a variety of conditions. Some of these are rheumatoid arthritis, plaque psoriasis, Crohn’s disease, ulcerative colitis, and many more.
Humira was generating more than half of AbbVie’s annual revenue at one point. The loss of patent exclusivity represents a significant overhang. AbbVie expects total sales to decline in 2023. At the same time, AbbVie expects a return to revenue growth in 2024.
Fortunately, the company prepared for the loss of patent exclusivity for Humira by investing heavily in new products as well as acquisitions to fuel its growth. For example, AbbVie has seen strong growth from Imbruvica, which achieved a 13.7% increase in sales in 2020.
Rinvoq and Skyrizi are two other products that are long-term growth catalysts.
Source: Investor Presentation
AbbVie also completed the $ 63 billion acquisition of Allergan. Allergan’s flagship is Botox, which diversifies AbbVie’s portfolio with a global aesthetic in mind. In 2020, AbbVie’s aesthetic portfolio had sales of $ 2.59 billion.
Share buybacks will also contribute 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 give cash back to shareholders. Overall, we expect AbbVie to grow EPS by 3%, reflecting the steep patent cliff over Humira.
Competitive advantage and recession performance
The main competitive advantage for AbbVie and any pharmaceutical company is its patent portfolio. Pharmaceutical giants have to spend a lot of money innovating new drugs and therapies when one of their blockbusters loses patent protection.
Research and development costs 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 track record of success when it comes to recessions. However, since sick people need treatment whether the economy is strong or not, AbbVie is very likely to continue doing well during a recession.
AbbVie’s earnings are likely to decline a bit in a recession, but the dividend should stay safe. AbbVie has a projected payout ratio of 42% in 2021.
Valuation and expected return
AbbVie is projected to generate adjusted earnings per share of $ 12.42 in 2021, which is in the middle of the forecast. At this EPS level, the share is currently trading with a price-earnings ratio of just 9.0.
AbbVie is well below the S&P 500 index. In addition, AbbVie is now undervalued relative to the historical average. Our fair value estimate for AbbVie is value for money of 10.0, a slight decrease from our previous P / E target due to increasing leverage from the Allergan acquisition.
Still, we see AbbVie as undervalued. A growing P / E ratio could increase shareholder returns by approximately 2.1% per year over the next 5 years.
In addition, we expect annual earnings growth of 3% through 2026. After all, the stock has a current dividend yield of 4.7%. Overall, we expect an annual return of 9.8% per annum over the next five years, which makes AbbVie stock a buy.
AbbVie is a very high quality company with a strong pharmaceutical pipeline and growth potential. It’s also a shareholder-friendly company that gives back excess cash flow to investors through share buybacks and dividends.
AbbVie faces a huge challenge when it comes to replacing lost Humira sales as it faces competition in the US and Europe. Fortunately, the company has prepared for this by investing heavily in R&D. This has resulted in a large portfolio of new products designed to keep AbbVie growing intact. AbbVie will generate additional growth through the proposed acquisition of Allergan.
With an expected return of nearly 10% annually, including a 4.7% return, we believe AbbVie is a buy for long-term value and income investors.
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