(Published by Bob Ciura on April 18)
Pharmaceutical companies are among the strongest dividend growth stocks in the market.
For example, AbbVie Inc. (ABBV, Financial) and Gilead Sciences Inc. (GILD, Financial) both currently sport above-average dividend yields.
When it comes to dividends, however, AbbVie has a head start over Gilead.
Going back to its days as a subsidiary of Abbott Laboratories (ABT, Financial), AbbVie is a Dividend Aristocrat, a group of companies in the S&P 500 that have raised dividends for at least 25 years.
You can see the entire list of Dividend Aristocrats here.
Both AbbVie and Gilead are highly profitable, with leadership positions in their respective therapeutic areas.
The rough patch big pharma currently finds itself in, however, is affecting Gilead far more than AbbVie.
This indicates AbbVie is the better investment for dividend growth investors.
Business overview
One of the main reasons why AbbVie is a better stock to buy than Gilead is because their fundamentals are moving in opposite directions.
Both companies are facing pressure from expiring drug patents and deflation in drug pricing, but AbbVie continues to grow.
Despite a very difficult operating environment, AbbVie still generated 29% earnings growth in 2015, followed by 12% growth last year.
Source: 2017 JP Morgan Healthcare Conference, page 4
AbbVie’s business model is propelled by Humira, its most important individual product by far. Humira itself accounted for more than half of AbbVie’s revenue last year.
Humira treats a variety of conditions, including arthritis, plaque psoriasis, Crohn’s disease and ulcerative colitis. Worldwide Humira product sales increased 16% in 2016 to $16.08 billion.
Meanwhile, Gilead is really struggling. Earnings per share declined 16% in 2016Ă‚ due to a 7% decline in sales.
Gilead’s fourth-quarter sales fell 3% year over year and have declined significantly over the past several years.
Source: 2016 Tear Sheet, page 1
Gilead’s challenges pertain to its portfolio of HCV drugs, led by the flagship hepatitis C treatments Harvoni and Sovaldi. Gilead’s HCV portfolio constitutes nearly 50% of its annual sales.
This is a big problem since Gilead’s HCV product sales declined 23% last year.
AbbVie has significantly outperformed Gilead over the past two years, a trend I expect to continue going forward.
Growth prospects
At a time when AbbVie and Gilead are facing challenges with their most important pharmaceutical products, they are both aggressively investing outside their core competencies for growth.
AbbVie believes Humira will continue to be one of its leading products even though it has now lost patent protection.
The company expects Humira to keep growing sales, eventually reaching $18 billion by the end of the decade.
Source: 2017 JP Morgan Healthcare Conference, page 13
In addition, AbbVie is making major investments across its pipeline.
The company possesses eight late-stage product categories that it expects to cumulatively produce as much as $30 billion in annual sales by 2020.
One of its promising areas is hematology. AbbVie’s sales from Imbruvica more than doubled last year to $1.8 billion. It is now the company’s second-largest product in terms of annual sales.
Overall, AbbVie expects 14% growth in adjusted EPS in 2017.
Gilead’s earnings are likely to go in the opposite direction of AbbVie’s.
At the same time, Gilead is looking outside HCV for growth.
Primarily, Gilead’s growth investments are in treatments for HIV. HIV product sales rose 17% last year and now account for approximately 44% of the company's annual revenue.
Source: 4Q Earnings Presentation, page 11
In addition, Gilead has other promising product categories in its portfolio, such as oncology.
It has a potential blockbuster on its hands in Zydelig. Sales of Zydelig have soared from $23 million two years ago to $168 million in 2016.
Separately, Gilead’s inflammation and respiratory portfolio is growing as well. In all, its non-HCV and HIV/AIDS portfolio grew sales by 14% last year.
Even with impressive growth in these areas, however, 2017 is likely to be another disappointing year for Gilead shareholders.
The reason is Harvoni and Sovaldi are expected to be a continued drag on 2017 sales. HCV net product sales are forecasted to be in a range of $7.5 billion to $9 billion this year.
This represents a steep drop; consider that last year, Gilead’s HCV sales were $14.8 billion. In 2015, Gilead had HCV sales of $19.1 billion.
With such a steep drop in sales, Gilead will likely post another year of significant earnings decline in 2017, while AbbVie is likely to generate double-digit earnings growth this year.
Dividends & valuation
Lastly, AbbVie has a big advantage over Gilead in terms of dividends.
Based on their recent share prices, AbbVie and Gilead have dividend yields of 4% and 3.1%, respectively.
This is a significant difference—AbbVie stock generates approximately 29% more dividend income than Gilead for every dollar invested.
Not only does AbbVie offer a much higher dividend yield than Gilead, but AbbVie also has exhibited stronger dividend growth.
In 2016, AbbVie increased its dividend by 12%.
Source: 2017 JP Morgan Healthcare Conference, page 14
Since the company’s spinoff in 2013, AbbVie has increased its dividend by 60%.
For its part, Gilead has only paid a dividend since 2015, so it is a relatively new dividend payer. It has not accumulated as impressive a dividend track record as AbbVie.
Gilead has averaged 10% annual dividend growth since it began paying dividends. This is a healthy growth rate, but again is less than AbbVie.
Additionally, Gilead’s future dividend growth rate could slow if the company’s sales and earnings continue to decline.
The one area in which Gilead does have a notable advantage over AbbVie is valuation. Based on its current share price, Gilead stock trades for a price-earnings ratio of roughly 6.7; AbbVie has a price-earnings ratio of 13.
Gilead’s valuation is nearly half AbbVie’s, but of course there is a reason for this. Investors are anticipating that future earnings will be much lower than 2016 levels.
Final thoughts
Gilead could provide stronger returns than AbbVie if the company can stabilize earnings and return to growth. The stock is extremely cheap based on valuation.
However, this is a big "if." Gilead has been rumored to be in the market for a major acquisition, but has not made any transformative deals yet.
AbbVie has a higher dividend yield, stronger fundamentals and faces less uncertainty than Gilead moving forward.
As a result, AbbVie is the better dividend growth stock right now.
To see another match up of two health care Dividend Aristocrats, click here.
Disclosure: I am long ABBV and ABT.
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