Ben Reynolds — editor of Sure Dividend — continues his review of his top five Dividend Aristocrats — selected from among those stocks in the S&P 500 Index that have each increased their dividends for 25 years in a row or longer.
In the stock market, investors often have to make trade-offs. There are growth stocks, which offer the potential for strong returns due to a rising share price, as the underlying company reports outsized growth in revenue and earnings-per-share.
Read Part 1 of this special report here.
Then there are dividend stocks, which tend to be slower-growth companies, but pay their shareholders attractive dividends to generate returns.
In select cases, investors can find a rare combination of both these qualities. We believe AbbVie Inc. (ABBV) is a Dividend Aristocrat that combines growth and dividends in one. The company is seeing strong growth due to its high-quality product pipeline, as well as the massive acquisition of Allergan.
Even better, AbbVie rewards shareholders with a high dividend yield, currently at 4.5%. As a result, AbbVie stock is an ideal mix of yield and growth.
AbbVie Plans For Its Future
AbbVie is a pharmaceutical manufacturer that traces its roots back to its former parent company Abbott Laboratories (ABT), which spun off AbbVie in 2013. At the time, the rationale for the spin-off is that it would free AbbVie to focus independently on its most important growth initiatives, with its own dedicated management team and financial resources.
The decision was the right one, as according to AbbVie it generated annual revenue and adjusted earnings-per-share growth of 13.5% and 18.8%, respectively, from 2013-2020.
Going forward, AbbVie faces a significant hurdle. Its most important product that fueled its impressive growth was Humira, a multi-purpose pharmaceutical that was once the top-selling drug in the world. The challenge is that Humira is now facing biosimilar competition in several international regions including Europe, which has had a negative impact as AbbVie has had to reduce the price to remain competitive. Making matters worse is that Humira will lose patent exclusivity in the U.S. in 2023.
The feared patent cliff is one of the biggest risks for pharmaceutical companies, as it can lead to market share losses and erosion of profit margins. When generics enter the market for lower prices, branded pharmaceuticals need to have their prices reduced to preserve share. This is a significant headwind for AbbVie moving forward.
Fortunately, the company has not simply sat idly by while this process has transpired.
Instead, the company has acted aggressively to invest both internally to build its pipeline, as well as externally through acquisitions. The end result is that AbbVie has a well-stocked product pipeline that should help the company continue to generate growth, even in a post-Humira environment.
Growth Catalysts
First, AbbVie has invested heavily in its own research and development platform, to restock its pipeline. AbbVie’s R&D expense totaled $6.5 billion in 2020. It now has multiple growth opportunities to replace Humira, particularly in the therapeutic areas of immunology, hematology, and neuroscience.
These investments are paying off, as AbbVie has multiple new products that could be future blockbusters. Specifically, AbbVie has seen strong growth from Skyrizi which grew revenue by 89% in the most recent quarter, while Rinvoq revenue more than doubled year-over-year.
Next, AbbVie has pursued M&A to boost its future growth potential. Its biggest deal was the $63 billion acquisition of Allergan. Allergan’s flagship product is Botox, which diversifies AbbVie’s portfolio with exposure to global aesthetics. This is a high-growth segment of the healthcare industry; AbbVie’s aesthetics portfolio generated revenue of $1.1 billion in the first quarter, up 35% year-over-year.
Overall, AbbVie continues to post impressive results, even with the gradual slowdown in Humira revenue. In the 2021 first quarter, AbbVie generated revenue of $13 billion, up 51% from the same quarter last year. Earnings-per-share grew 22% year-over-year.
Reflecting its improved prospects, AbbVie also raised full-year guidance upon announcing its first-quarter results. AbbVie now expects adjusted earnings-per-share in a range of $12.37 to $12.57 for 2021.
At the midpoint of guidance, AbbVie’s adjusted EPS is expected to rise 18% for this year, making 2021 another year of strong growth for AbbVie. Shareholders naturally benefit from this growth, with a high dividend payout and regular dividend increases.
Expected Returns
AbbVie is likely to continue on a path of growth moving forward. We expect the company to generate 3% earnings-per-share growth over the next five years. This could prove to be a very conservative estimate, which we attribute to the elevated investment needs in R&D to continue building its pipeline.
Next, we view the stock as attractively valued. AbbVie stock trades for a price-to-earnings ratio of just 9.3 based on projected 2021 adjusted EPS. This is a fairly low valuation multiple for a highly profitable and growing company such as AbbVie.
We believe AbbVie’s low valuation multiple is the result of investor uncertainty over the company’s future, as it pertains to Humira. Nevertheless, we view fair value as a price-to-earnings ratio of at least 10. Expansion of the valuation multiple could be a slight boost to shareholder returns moving forward.
Lastly, AbbVie’s returns will be fueled by its hefty dividend payout. AbbVie stock currently yields 4.5%, a highly attractive payout considering the S&P 500 Index yields just 1.4% on average right now. Therefore, AbbVie stock provides more than three times the dividend income as the broader market index, making it a highly appealing pick for income investors such as retirees.
Even better, AbbVie is a dividend growth stock. It has declared impressive dividend increases since the spin-off from Abbott. According to AbbVie, from 2013 to 2020 the company grew its quarterly dividend by 225% cumulatively. Putting it all together—future EPS growth, a rising valuation multiple, and the dividend payouts—we expect total returns above 9% per year.
Final Thoughts
AbbVie is a top pharmaceutical stock for investors looking within the healthcare industry. It has multiple growth catalysts that will fuel its post-Humira future.
While AbbVie expects its total revenue to decline in 2023, reflecting the loss of Humira patent exclusivity in the United States. But the company also expects to return to growth in 2024 and beyond, driven by new products as well as the Allergan acquisition.
In the meantime, investors have the opportunity to buy a high-quality company at a low valuation, with a high dividend yield. This makes AbbVie a top Dividend Aristocrat for growth and yield. Disclosure: The author is long ABBV.)
