AbbVie (ABBV) is a pharmaceutical company focused on immunology, oncology, and virology; the company was spun off by Abbott Laboratories (ABT) in 2013 and now trades with a market cap of $130 billion, asserts Ben Reynolds, editor of Sure Retirement.
Its most important product is Humira, which by itself represents ~60% of annual revenue. Humira sales continue to decline and after all patent protections expire, it will produce virtually no revenue. However, AbbVie is hard at work to replace that lost revenue before it occurs.
The loss of exclusivity for Humira has already transpired in Europe and will occur in the U.S. in 2023. Fortunately, the company’s massive research and development platform is a competitive advantage. AbbVie invested $6.4 billion in research and development last year alone. The investment is already paying off and the firm has multiple growth opportunities to replace Humira.
AbbVie was not a standalone company during the last financial crisis, so there is no recession track record, but since sick people require treatment whether the economy is strong or not, it is highly likely that AbbVie would continue to perform well during a recession. AbbVie’s earnings are likely to decline somewhat in a recession, but the dividend should remain secure. AbbVie has a projected dividend payout ratio of 49% for 2020.
Despite the challenge posed by loss of exclusivity on Humira, we believe AbbVie has long-term growth potential. First, it has invested heavily in building its pipeline of new products.
For example, Imbruvica sales increased 29% in 2019, while sales of Venclexta more than doubled last year. AbbVie also announced the $63 billion acquisition of Allergan (AGN). The combined company will have annual revenues of nearly $50 billion.
AbbVie expects the transaction to be 10% accretive to adjusted earnings-per-share over the first year, with peak accretion of greater than 20%. AbbVie expects adjusted diluted earnings-per-share of $9.61 to $9.71 for 2020 on revenue growth of 8% against 2019.
Based on expected 2020 earnings-per-share of $9.66, AbbVie stock trades for a price-to-earnings ratio of 9.5. Our fair value estimate for AbbVie is a price-to-earnings ratio (P/E) of 10.5. We view AbbVie as meaningfully undervalued.
An expanding P/E multiple could boost shareholder returns by approximately 2.0% per year over the next 5 years. In addition, we expect annual earnings growth of 5.5%, while the stock has a 5.4% dividend yield. We expect total annual returns of 12.6% per year over the next five years.
