Ben Reynolds' Top Dividend Aristocrats: Part 1

12/06/2019 6:00 pm EST


Ben Reynolds

CEO, Sure Dividend

In this special 4-part report, Ben Reynolds, editor of of Sure Dividend, has reviewed his favorite ideas among the Dividend Aristocrats, an elite group of companies in the S&P 500 Index with 25+ consecutive years of dividend growth. He begins this feature with a look at a leading biotechnology stock.

Investors looking for high-quality dividend growth stocks should consider the Dividend Aristocrats. There are just 57 Dividend Aristocrats today, making it an exclusive list.

As a group, the Dividend Aristocrats have provided shareholders with dividend yields well above the broader market average, while raising their dividends every year regardless of the economic climate.

Our top-ranked Dividend Aristocrats today is health care giant AbbVie Inc. (ABBV), which has a 5.3% dividend yield, a low valuation, and a compelling future growth outlook.

Click here to download an Excel Spreadsheet with all 57 Dividend Aristocrats now. Inside you will find metrics that matter like price-to-earnings ratios, market capitalizations, and dividend yields for each stock. 

Business Overview and Recent Earnings

AbbVie was spun-off from former parent company Abbott Laboratories (ABT) in 2013. As a result, AbbVie is a stand-alone pharmaceutical company. It is an industry giant, with annual revenue of approximately $33 billion and a market capitalization of $130 billion.

AbbVie’s core therapeutic areas include immunology, oncology, and virology. AbbVie’s largest single product is multi-purpose drug Humira, which represented approximately 58% of the company’s total revenue over the first three quarters of 2019.

AbbVie’s concentration on Humira has fueled the company’s revenue and earnings growth in recent years, but now poses a challenge for the company.

AbbVie is still heavily reliant on Humira, which is a potential concern for investors as Humira is now facing biosimilar competition in the international markets. This caused Humira revenue outside the U.S. to fall 32% last quarter. Complicating matters further is the fact that AbbVie will lose patent exclusivity for Humira in the U.S., starting in 2023.

Despite this patent risk, AbbVie continues to perform well overall. For the most recent quarter, total revenue of $8.5 billion increased 3.5% on an operational basis, which excludes non-recurring items as well as foreign exchange fluctuations. Humira revenue increased 10% domestically.

Growth in U.S. Humira sales as well as positive contributions from AbbVie’s new products were more than enough to offset the significant decline for international Humira sales. AbbVie also increased its adjusted earnings-per-share by 9% year-over-year, reflecting another strong performance for the company last quarter.

Growth Prospects

Even though AbbVie faces significant competition for its flagship product Humira in the years ahead, we still expect the company to continue growing revenue and earnings at a satisfactory rate. AbbVie has multiple opportunities for future growth, both organically and through acquisitions.

AbbVie is a huge company with massive financial resources to invest heavily in growth. One way it has done this is through research and development to build its own pipeline. In each of the past two years, AbbVie spent over $5 billion on R&D after spending $4.4 billion in 2016.

The result of this investment is that the company now has a restocked pipeline of new products that will contribute to its future growth. This is already materializing for AbbVie; for example, over the first three quarters of 2019 AbbVie generated sales of $3.4 billion for Imbruvica, a 31% increase from the same period last year. Separately, sales of Venclexta more than doubled over the first three quarters of this year.

Acquisitions will also play a major role in AbbVie’s future growth. Earlier this year, AbbVie announced the $63 billion acquisition of Allergan (AGN), maker of the highly popular cosmetic product Botox. The deal presents a number of strategic benefits for AbbVie, first of which is diversifying its product portfolio into cosmetic products with Botox and also Juvederm.

And, it also provides AbbVie ownership of one of the most successful individual products on the market today, which continues to grow at a high rate. Botox generated $2.63 billion of revenue for Allergan over the first three quarters of 2019, up 5.3% from the same nine-month period last year.

Of course, Allergan is not solely reliant on Botox. It has its own portfolio of new products that hold future growth potential. For example, sales of its Juvederm collection increased 8% to $830 million over the first three quarters of 2019. Meanwhile, sales of anti-psychotic Vraylar increased 71% to $337 million in the same period.

Once the acquisition is completed, the combined company will have annual revenues of nearly $50 billion. There are also significant synergy opportunities from the merger, as AbbVie and Allergan have similar R&D and operational processes. AbbVie expects the transaction to be 10% accretive to adjusted EPS over the first full year following the close of the transaction, with peak accretion of greater than 20%.

These multiple catalysts are expected to fuel continued growth for AbbVie, this year and beyond. Along with its recent quarterly results, the company raised its full-year guidance. AbbVie now expects 2019 adjusted EPS in a range of $8.90 to $8.92, up from $8.82 to $8.92. The new guidance range represents full-year adjusted EPS growth of 12.6%, at the midpoint of guidance.

Valuation and Dividend Analysis

We believe AbbVie stock is a long-term buy not just for its future growth potential, but also because the stock appears to be significantly undervalued. The market remains highly pessimistic regarding AbbVie stock, presumably due to patent risk and concerns over the relative concentration of AbbVie’s portfolio.

As a result, shares of AbbVie trade for a 2019 price-to-earnings ratio of just 9.9, which we believe is far too low for such a high-quality—and growing—business.

Our fair value estimate for AbbVie is a price-to-earnings ratio of 10.5, which still may be too conservative if AbbVie realizes the full benefits of its Allergan acquisition. Still, we view AbbVie as an undervalued stock. An expanding P/E multiple could boost shareholder returns by approximately 1.2% per year over the next 5 years.  

In addition, we expect annual earnings growth of 9.5% through 2024, thanks to the contributions from AbbVie’s pipeline as well as the Allergan acquisition. Lastly, AbbVie stock has a current dividend yield of 5.4%, and the dividend payout appears to be highly secure. AbbVie has a projected dividend payout ratio of just over 50% for 2019, and the company recently raised its dividend by 10%.

In total, we expect annual returns slightly above 16% per year over the next five years, making AbbVie one of our highest-ranked Dividend Aristocrats in terms of expected total return.

Final Thoughts

Stocks that offer a combination of a low valuation, high dividend yield, and long-term growth potential are hard to find. In the stock market, investors often have to choose between dividend growth stocks that offer future growth potential but weak starting yields, or high-yield dividend stocks that offer little-to-no growth potential.

Overall, AbbVie is a very rare stock that combines all three qualities, making it an attractive buy for long-term dividend growth investors.

Click here to download an Excel Spreadsheet with all 57 Dividend Aristocrats now. Inside you will find metrics that matter like price-to-earnings ratios, market capitalizations, and dividend yields for each stock. 

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