Dividend growth investing has proven to be one of the best ways for retail investors to accumulate wealth over the long term. One of the factors that boosts the wealth-creating power of dividend growth investing, is dividend reinvestment.
Dividend reinvesting makes one’s share count rise, even if there is no additional principal invested into new shares. The growing share count, combined with the rising per-share dividends that are offered by dividend growth stocks such as the Dividend Aristocrats, allows for an even faster income growth rate. A select group of stocks even offer shareholders no-fee DRIPs.
Several of the Dividend Aristocrats offer such DRIPs without any additional fees. You can see the top 15 best DRIP stocks here.
One of the top 15 Dividend Aristocrats that offers a no-fee DRIP is AbbVie Inc. (ABBV, Financial).
Company Overview
AbbVie was created through the spin-off of former parent Abbott Laboratories (ABT, Financial) in 2013. The company is currently trading with a market capitalization of $122 billion.
AbbVie reported its most recent quarterly results on Jan. 25. The company was able to generate revenues of $8.3 billion, which represents an increase of 7.4% compared to the prior-year quarter. This revenue growth was possible primarily thanks to the strong performance of Imbruvica (which generated revenue of $1.01 billion, growing 42% year over year), while Humira remained the company’s largest cash cow. Smaller drugs in AbbVie’s portfolio generated solid growth rates as well.
AbbVie generated earnings per share of $1.90 during the fourth quarter, which was 28% more than in the year-ago quarter. Operating leverage, due to relatively low variable costs, allows AbbVie to grow its profits at a much faster rate than its revenues. The company guides for earnings per share in a range of $8.65 to $8.75 during fiscal 2019, which implies an earnings per share growth rate of 10% at the midpoint.
Growth prospects
AbbVie’s drug portfolio, as well as its research and development efforts, are focused on immunology and oncology. Its biggest drug, Humira, which is also the world’s best-selling drug overall, targets indications such as rheumatoid arthritis and ulcerative colitis. Through a rising patient count and price increases, the revenue generated by Humira should continue to grow for the next couple of quarters in the U.S. But in the early 2020s, its U.S. patents will expire, which means Humira’s sales will have to be replaced.
In Europe, biosimilars to Humira were introduced in 2018, which has led to lower international sales for the drug. AbbVie has developed two new drug candidates (upadacitinib and risankizumab) that target the same indications as Humira and have delivered strong results during clinical trials. The company's management believes these new, improved drugs will be able to capture most of the current Humira revenues that need replacement over the next couple of years.
AbbVie also continues to develop new drugs, primarily in immunology and oncology. The approval of existing drugs in new indications, which has been a factor for the strong growth rates of oncology drug Imbruvica, for example, plays a role for AbbVie’s growth outlook as well. The company's executives said that revenue, without Humira and excluding any mergers or acquisitions, will total $35 billion in the mid-2020s. If management’s forecasts are correct, AbbVie’s top line will thus continue to grow over the next couple of years, despite the Humira patent cliff.
Rising revenues are one of the ways through which AbbVie will be able to grow its profits, but earnings per share will also be positively impacted by the company’s stock buybacks. AbbVie produces large free cash flows that are returned to its owners via dividends and share repurchases. In 2018, the company bought back more than 5% of its shares, and it is likely there will be additional stock buybacks over the next couple of years.
Valuation, dividends and expected returns
AbbVie’s shares have been trending downward over the last couple of months, hitting lows of less than $80 per share repeatedly during that time. It seems as if shares have found a bottom there as they have recovered recently and the downward trend has stopped. Right now, with shares trading at $83, AbbVie is trading at just 9.5 time this year’s profits, according to management’s guidance figures. This means shares are quite inexpensive right now relative to how they were valued in the past.
AbbVie’s low share price has also made the dividend yield rise to a relatively high level. Currently, investors can purchase AbbVie’s shares with a yield of 5.2%. The company has grown its dividend at a strong pace over the last couple of years and due to the fact it targets 10% earnings per share growth for 2019, it seems likely the next dividend raise will be a quite meaningful one again.
Through its dividend yield of 5.2% and some earnings per share growth, AbbVie has a good chance of delivering compelling total returns in the double-digit range. If the company’s earnings multiple expands toward the low-teens range, its total returns would be even larger. But due to the market’s worries about the Humira patent expiration, it is also possible that AbbVie continues to trade at a below-average valuation for the foreseeable future.
Final thoughts
AbbVie offers a strong dividend yield, reliable dividend growth as well as share price growth potential due to a positive long-term growth outlook and a below-average valuation. For very long-term-oriented investors, AbbVie looks like an attractive investment as the Humira patent expiry will likely not be a meaningful headwind in the long run (management forecasts that revenues will rise nevertheless). The fact dividend growth investors can automatically DRIP their AbbVie investment at no additional cost makes the stock even more attractive for this group of investors.
Disclosure: I am long ABBV.
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