This is a guest post written by Bob Ciura with Sure Dividend. Sure Dividend focuses on long-term dividend growth investing.
Stocks are typically grouped into one of two main categories, depending on their individual characteristics.
Some are called growth stocks, which are those companies that are in the growth phase of their corporate maturity.
These are usually companies that produce above-average revenue and earnings growth each year.
Then, there are value stocks, which are cheaply priced based on their price-to-earnings ratios. Value stocks also tend to pay dividends to shareholders.
Health care giant AbbVie (ABBV) might be one of the rare stocks that offers a mix of both qualities.
AbbVie has generated excellent growth since it was spun off by Abbott Laboratories (ABT) in 2012.
And, AbbVie is a Dividend Aristocrat, a group of companies in the S&P 500 that have raised dividends for 25+ years.
You can see the entire list of Dividend Aristocrats here.
This article will discuss how AbbVie stock can fulfill investors’ desire for growth and dividend income.
Business Overview
AbbVie is a global health care company, operating in the pharmaceutical industry.
It was spun off from Abbott, so that it could grow on its own without being held back by some of Abbott’s slower-growth segments.
This is a difficult environment for pharmaceutical companies like AbbVie, because of intensifying pressure on drug prices.
Not only that, but drug companies are always at risk of losing patents on major blockbusters, which opens the floodgates to generic competition.
AbbVie is not immune from these pressures.
However, the company has still generated excellent earnings growth over the past several years, even in a highly challenging climate.
Source: 2017 JP Morgan Healthcare Conference, page 4
In 2015, earnings-per-share soared 29%. Last year, AbbVie managed 12% earnings growth, which is still quite impressive given the industry headwinds.
Its growth is largely due to the success of Humira, the company’s most important individual product.
Humira has been a major blockbuster for the company—its sales increased 16% last year.
But now that Humira has lost patent protection, AbbVie could be vulnerable to generic competition. Humira alone accounted for more than 60% of AbbVie’s total revenue in 2016.
The good news is AbbVie expects Humira to continue growing sales, even when new competition enters the market.
Growth Prospects
AbbVie has a two-fold growth strategy: continuing expansion of Humira, and growth from new products.
AbbVie’s future growth will still heavily involve Humira.
Even though Humira is off patent, AbbVie believes it can continue growing, because its high effectiveness has differentiated itself from rival drugs.
By 2020, AbbVie expects Humira will generate $18 billion in annual sales, which would represent 12% growth from 2016 revenue.
Source: 2017 JP Morgan Healthcare Conference, page 13
And, AbbVie continues to invest heavily in R&D, to pursue new drug development.
R&D expense was $4.4 billion in 2016, representing 17% of revenue.
This spending has paid off, as the company has a robust pipeline to fuel future growth. AbbVie often refers to its portfolio as “de-risked”, meaning it has many late-stage entities that are nearly ready to hit the market.
In all, AbbVie has eight late-stage therapies that the company believes can collectively generate $25 billion-$30 billion of annual revenue by 2020.
One of the biggest long-term growth opportunities for the company is in hematology, which is a large and relatively under-served market.
Source: 2017 JP Morgan Healthcare Conference, page 9
AbbVie envisions hematologic malignancies being a $50 billion market by 2020, compared with a $29 billion market in 2015.
This sets up a huge opportunity for AbbVie, since it has taken a leadership position in this category. Its major drugs designed to address this therapeutic area include Imbruvica and Venetoclax, which it launched in 2013 and 2016, respectively.
The early results are very encouraging: Imbruvica sales more than doubled last year, to $1.8 billion. Imbruvica is now AbbVie’s second-biggest drug by annual revenue, behind Humira.
Led by these two drugs, AbbVie’s hematological malignancy portfolio is equipped to serve two-thirds of the total addressable market.
Valuation & Expected Total Returns
AbbVie generated adjusted earnings-per-share of $4.82 in 2016. Based on its recent share price, the stock trades for a price-to-earnings ratio of just 13.5.
This is well below average.
For example, the S&P 500 Index trades for a price-to-earnings ratio of 26 on average.
As a result, AbbVie stock could be very cheap. If the price-to-earnings ratio increased to 26, the stock would double from here, just from an expanding valuation multiple.
Aside from a higher valuation, AbbVie stock will generate future returns based on earnings growth and dividends.
A potential breakdown of AbbVie’s long-term returns could be as follows:
- 6%-8% revenue growth
- 1% growth from share repurchases
- 4% dividend yield
Going forward, the stock could provide 11%-13% total returns. And again, this does not include any expansion of the price-to-earnings multiple.
Therefore, AbbVie stock is very attractive on a valuation basis.
Dividend Analysis
As previously mentioned, AbbVie is a Dividend Aristocrat, going back to when it was a subsidiary of Abbott.
Since its spin-off and IPO, the company has accelerated its dividend growth, thanks to its high earnings growth over the past several years.
Source: 2017 JP Morgan Healthcare Conference, page 14
Such strong dividend growth has elevated AbbVie’s dividend yield to a hefty 4%.
Its dividend yield is double the 2% average dividend yield of the S&P 500 Index.
There should be little reason why AbbVie cannot continue to grow its dividend at double-digit rates going forward.
Based on adjusted earnings-per-share, AbbVie carried a dividend payout ratio of 53%. This means the company distributed just over half of its 2016 adjusted earnings-per-share as dividends to shareholders.
A payout ratio slightly above 50% is very comfortable.
And, the company is likely to continue growing earnings-per-share, meaning 10% annual dividend growth over the next several years is definitely possible.
Final Thoughts
AbbVie has all the qualities investors should look for. It has compelling revenue and earnings growth potential, and the stock has a cheap valuation.
Plus, AbbVie stock has a hefty 4% dividend yield, making it an attractive income opportunity as well.
Because of these qualities, AbbVie ranks highly using Sure Dividend’s 8 Rules of Dividend Investing.
AbbVie is among the top health care stock opportunities for 2017.
Its impressive financial performance, even in a tough environment, demonstrates the strength of its business model and future pipeline.
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