AbbVie Inc. ABBV informed the market Thursday that the board of directors of the company has authorized an increase to its $10 billion stock repurchase program, which was announced this year on Feb. 15, up to $15 billion.
The market should have reacted positively on Thursday but instead it answered with a 1% dip in the share price to $87.71.
Despite Thursday’s decline, I am expecting some upside in the market value of AbbVie following the announcement.
The U.S. global biopharmaceutical company originated in 2013 as a spin-off of Abbott Laboratories (ABT) Analysts forecast that it will deliver adjusted diluted earnings of $8.72 per share in full fiscal year 2019.
The producer of the rheumatoid arthritis treatment Humira, AbbVie’s flagship product, has about 1.5 billion shares outstanding, giving it adjusted net earnings of $13.1 billion for full fiscal year 2019, according to expectations. The bottom line is predicted to be backed by revenue of $33.6 billion, reflecting 2.5% growth from the top line of $32.8 expected for full fiscal year 2018 and a 19% boost from year-ago sales.
If AbbVie enacts the stock repurchase program for $5 billion, acquiring more than 50 million shares at a price of $94 per share within the next 52 weeks, the company should close the fiscal year 2019 with adjusted diluted earnings per share of $9.02, a 3.4% increase from the forecasted $8.72.
The $94 share price is an estimate of the market valuation that AbbVie can assume on average over the following 52 weeks. The estimate is a mean of $87.71 to $100.33 per-share range. The low of the range is the share price of AbbVie at close Thursday and the high is the mean price target established by analysts who are forecasting a 14% stock appreciation within the next 52 weeks.
Following an 11.5% increase in the cash quarterly dividend to $1.07 from the most recent quarterly distribution of 96 cents, the company’s payout ratio is about 49.1% of total adjusted net earnings.
Assuming 49.1% will stay constant over next 52 weeks, if we apply the ratio to the forecasted diluted adjusted EPS of $9.02, it yields an annual dividend of $4.43 for a higher forward dividend yield of 5.05% relative to the share price of $87.71 at close Thursday.
So, AbbVie may hold a higher value than what we can figure out from available financial ratios.
The question is: can AbbVie afford a $5 billion buyback program representing about 53 million shares of its own common stock in one year?
The answer to the question comes from AbbVie’s history of stock repurchase programs. In 2016, the company bought back about 34 million ordinary shares, investing $2.1 billion or about 30% of its operating cash flow of $7.04 billion. The company also paid dividends for $3.72 billion. AbbVie closed 2016 reporting revenue of $25.64 billion.
In 2015, AbbVie repurchased approximately 46 million shares of its common stock, spending about $2.8 billion or 37% of its operating cash flow of $2.8 billion. The company also distributed dividends for $3.3 billion. AbbVie reported a full fiscal 2015 revenue of $22.86 billion.
The business provides AbbVie with more than enough financial means to sustain the transaction for three reasons: revenue is progressively increasing at 9.6% average yearly rate, total liquidity of $8.8 billion available in cash on hand alone covers the dividend payment for one and a half years, and operations are producing a cash flow of 5.3x what that of two or three years ago.
The $5 billion buyback program represents about 38% of cash flow of nearly $13 billion that AbbVie generated from its trailing 12-month operations.
The company has total debt of $41.22 billion. The amount should not go unnoticed. However, the interest coverage ratio of 8.41, which is far beyond the threshold of 1.5, and a return of invested capital of 29.15% versus a cost of capital of 11.12% are indicating that AbbVie is not only comfortable with the payment of interest expenses but is also receiving a higher return from investments.
This is possible thanks to a fruitful portfolio of treatments that cover a broad range of illnesses. The key drivers of sales are HUMIRA, the commercial name for adalimumab, and IMBRUVICA, the trade name of AbbVie’s Bruton's tyrosine kinase.
In addition to rheumatoid arthritis Humira is also used to treat psoriatic arthritis, ankylosing spondylitis, Crohn's disease, chronic psoriasis, ulcerative colitis, hidradenitis suppurativa and juvenile idiopathic arthritis.
IMBRUVICA is used to treat B cell cancers like, chronic lymphocytic leukaemia, mantle cell lymphoma and the macroglobulinemia of Waldenström.
Humira represents 60% to total revenues and Imbruvica covers about 12%. The company closed the third quarter reporting revenue of $8.24 billion, reflecting a 17% increase year over year. Of that, $5.124 billion was from the sale of Humira and $972 million from the sale of Imbruvica. Sales of Humira and Imbruvica were 9% and 41.3% higher than the corresponding trimester of 2017.
In addition, consensus is that net earnings will increase 16.84% every year over the next five years.
AbbVie’s share price fell 10% for the 52 weeks through Thursday and is still below the 100- and 200-day simple moving average lines.
The market capitalization is $131.93 billion.
The 14-day Relative Strength Indicator is 48 suggesting the stock has not reached either oversold or overbought levels. The 52-week range is $81.5 to $125.86.
The price-sales ratio is 4.28 higher than the industry median of 3.10, but profitability and growth capabilities of the company are scored with a high rating of 8 out of 10 by GuruFocus. Also, for reasons listed abbove, such a price-sales ratio is justified.
The price-earnings ratio is 18.12 compared to an industry median of 23.77.
As of December, there are 20 recommendations on AbbVie. Four analysts suggest a strong buy, six analysts recommend a buy and 10 analysts suggest to hold. As a result, the recommendation mean is 2.6 out of 5.
Disclosure: I have no positions in any securities mentioned.
