The performance of the U.S. stock market disappointed investors in 2018, as the S&P 500 index has declined 4% year to date. Fears of slowing global economic growth and escalating trade tensions have eroded investor sentiment. But these fears have not yet shown up in the economic data. The U.S. economy continues to expand, consumer confidence remains high, and corporate earnings are on the rise.
This is all broadly positive for equity investors, which means it is entirely possible that the stock market could continue to climb the “wall of worry” in 2019. If the performance of the stock market improves next year, investors should buy high-quality stocks that offer growth, such as healthcare giant AbbVie Inc. (ABBV, Financial). AbbVie has a high dividend yield of 5.1%, and according to the stock Beta value, could outperform the S&P 500 if the market continues to rise in 2019.
A big pharma stock for growth and income
AbbVie is a pharmaceutical company that began as a spin-off of Abbott Laboratories in 2013. Since then, the company has generated strong growth. It produced annual sales in excess of $30 billion each year. AbbVie has a market capitalization of approximately $136 billion. Today, AbbVie focuses on three core therapeutic areas: immunology, oncology and virology. Specifically, Humira is the flagship of AbbVie’s fleet. Humira is the top-selling drug in the world, collecting over $18 billion in sales last year all by itself.
Thanks in large part to Humira, AbbVie has generated excellent growth since its spin-off from Abbott. The company’s strong results have continued in 2018, despite investor worries over global economic growth. AbbVie generated revenue of $8.2 billion in the third quarter, up 18% from the same quarter last year. Humira revenue increased by 9% in the third quarter.
Other products exhibited strong growth as well, such as Imbruvica, which increased sales by 41%. AbbVie’s adjusted earnings per share of $2.14 rose 52% from the same quarter a year ago. AbbVie also lifted its guidance for 2018, now expecting 41% earnings growth for the full year.
AbbVie shareholders have benefited from Humira’s explosive growth. AbbVie stock has a 5.2% dividend yield, which is highly attractive for income investors, as the broader S&P 500 index has an average dividend yield around 2%. AbbVie is also a dividend growth company. Since its inception in 2013, AbbVie has increased its dividend by 140%.
Going forward, AbbVie is well positioned for a future that goes beyond Humira, which is facing competition in a number of countries. AbbVie has resorted to steep price cuts in Europe to fend off the competition. Loss of patent protection is a risk to AbbVie’s future growth, because Humira is the company’s top product by far.
Fortunately, AbbVie has prepared for increasing competition to Humira. It has broadened its product portfolio and made huge investments in its future pipeline. AbbVie’s research and development spending increased 16% last year, to $4.8 billion. These investments are finally bearing fruit. AbbVie expects non-Humira sales to grow from approximately $9.6 billion in 2017, to more than $16 billion in 2020, and over $35 billion in 2025.
Beta value: overview and application
Beta value compares how much a stock price is expected to move, in relation to how the broader S&P 500 index moves. For example, a stock with a beta value of 1.0 indicates the share price is expected to increase 1% for every 1% increase in the S&P 500 index. On the other hand, a beta value above 1.0 means the stock will increase more than 1% for every 1% move in the S&P 500. If a stock has a beta value of 1.20, it is expected to increase 1.2% for every 1% increase in the S&P 500 Index, while a beta value of 0.80 indicates a 0.8% increase for every 1% rise in the S&P 500.
Beta value is a commonly used measure of volatility. Investors can choose how much underlying volatility they want in their stock portfolios, which is helpful in anticipation of a significant rise or fall in the stock market. Stocks that have beta values above 1.0 could underperform in a market downturn; the opposite case is that they could outperform if the market rallies. AbbVie has a beta value of 1.67, which means for every 1% increase in the S&P 500, the stock could be expected to increase 1.67%. The above-average volatility exposes investors to a downturn, but could bring outperformance if the market rallies in 2019.
The bottom line
The U.S. stock market has put forth a meager performance in 2018. But rather than try to time the market, investors should continue to focus on high-quality stocks. Companies with durable competitive advantages and the ability to grow earnings and dividends like AbbVie should be bought and held over the long term. No matter what the market does, AbbVie is a highly profitable company that rewards shareholders with an attractive dividend yield as well as growth.
Disclosure: I am long AbbVie.
