There's a lot to like about the Dividend Aristocrats: the safety that comes with 25+ consecutive years of rising dividends, a history of outperforming the S&P 500 and lower volatility than the overall market, explains Ben Reynolds, editor of Sure Dividend
While the Dividend Aristocrats score high marks for safety, longevity, dividend growth, and total returns, they are lacking in one area that is critical for those in or near retirement. They yield just 2.2%, not far off from the S&P 500's dividend yield of 1.8%. That's lackluster for a group of stocks categorized for dividends.
As it turns out, from the 53 Dividend Aristocrats, only 3 have yields of near 4% or greater, and only 1 has a yield above 6%. The third highest-yielding stock is AbbVie (ABBV), with a yield of 3.92%. (For disclosure, Ben Reynolds is long AbbVie.)
AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology and virology. AbbVie was spun off by Abbott Laboratories (ABT) in 2013. The company has a rather short stand-alone history. Nevertheless, AbbVie has become one of the biggest players in the biotech industry, with sales of $30 billion annually and with a market capitalization of $151 billion.
AbbVie reported its second quarter results on July 27. The company earned $2.00 per share during the second quarter, which was 41% more than during the second quarter of 2017. AbbVie also managed to grow its revenues at an attractive pace of 19% year over year. The top line number hit $8.3 billion, which makes AbbVie one of the largest biotech companies.
Humira once again was a key growth driver. Imbruvica and AbbVie’s HCV franchise, which consists of several drugs, delivered strong growth rates as well. AbbVie has increased its earnings per share guidance for fiscal year 2018 to $7.76 -$7.86, $0.10 more than the previous guidance range.
Earlier in July AbbVie and Mylan (MYL) inked an agreement that states that Mylan’s biosimilar to Humira will not be sold before July 2023. Mylan will pay royalties to AbbVie from 2023. Both items of this agreement are very positive.
AbbVie’s explosive earnings per share growth started shortly after the company was spun off from Abbott Laboratories in 2013. Since then EPS have grown by sixteen percent annually. This year AbbVie’s EPS should increase significantly again, driven by lower taxes and ongoing growth from drugs such as Humira and Imbruvica.
We expect earnings-per-share growth of 10% a year over the next several years. Due to low variable costs in the drug industry (i.e. high gross margins), revenue growth from existing and new drugs leads to margin increases. This allows AbbVie to record high earnings growth rates as long as its sales keep increasing.
AbbVie’s efforts in shielding Humira from competition through 2023 and its substantial R&D investments for next-generation drugs will allow the company to keep revenues growing through the 2020s. Patent expiry of its top drug Humira is still a couple of years away, which gives AbbVie enough time to bring new drugs to the market.
AbbVie started paying dividends in 2013 and has since increased the payout significantly. In 2017 alone AbbVie has already raised the dividend twice, and if the dividend payout ratio stays around 50% AbbVie could pay out close to $6 per share in 2023.
The stock is currently valued at 11.5 times this year’s earnings, a substantial discount to its fair valuation. This will be a significant tailwind for AbbVie’s total returns. AbbVie’s shares also offer an attractive dividend yield of 4.3% right now, which is another positive for the total returns that investors will likely receive going forward.
Since 2013 AbbVie’s gross profits as a percentage of its assets have declined significantly. This is attributed to a material increase in its asset base from the Pharmacyclics acquisition in 2015. The takeover is starting to pay off, but since Imbruvica sales are still ramping up, the effect is still visible. AbbVie has a rather high debt to asset ratio, but interest coverage remains strong, therefore investors need not worry about debt levels being too high.
The healthcare industry, and especially the drug industry, is not cyclical. Since sick people require treatment whether the economy is strong or not, it is highly likely that AbbVie would perform well during a recession.
AbbVie’s Humira patent protection will expire in a couple of years, but the company continues to see strong Humira sales. AbbVie is working on next-generation drugs targeted at the same indications Humira is treating, thus there is a good chance that the patent expiration will not be a major headwind.
AbbVie’s task is to bring replacements for Humira to the market over the next five years, as biosimilars to its top drug will be available from 2023. With its strong pipeline AbbVie likely will be able to do that. Through its high dividend yield, strong earnings growth and some multiple expansion, AbbVie should be able to deliver compelling total returns going forward. The stock earns a strong buy recommendation at current prices.
