AbbVie Inc. (ABBV, Financial) is one of the largest pharmaceutical companies in the U.S. It is not only a mega-cap stock with a valuation of $100 billion, but it has also been a terrific dividend growth story since the spin-off.
AbbVie has increased its dividend every year since it became a standalone company, compounding its payout growth by around 18% annually. That track record of growth is part of the reason we like the stock so much. In fact, AbbVie is one of three stocks we’ve picked for investors who want to create a portfolio that provides dividends each calendar month. AbbVie pays its quarterly dividends in February, May, August and November.
AbbVie offers investors a robust 6.3% yield, strong growth prospects and a cheap valuation. For these reasons, we see AbbVie as providing tremendously strong total prospective returns in the coming years and rate the stock a buy.
Business overview and recent events
AbbVie was created in a spin-off transaction at the beginning of 2013. Since that time, AbbVie shares have gained 100%, which is exactly in line with the broader market, as measured by the S&P 500 index. By contrast, shares of Abbott Laboratories (ABT, Financial), the company it spun off from, have gained 164% in the same period.
Today, AbbVie is a diversified biotechnology company that develops and sells drugs for immunology, oncology and virology. The company is heavily reliant upon Humira, but has put forth a significant amount of effort recently to diversify away from the world’s best-selling drug.
AbbVie enjoys $33 billion in annual sales and has a market capitalization of $100 billion after a period of significant weakness in the stock.
AbbVie’s first-quarter results included essentially flat year-over-year revenue of $7.8 billion. Imbruvica remains a bright spot, as it generated just over $1 billion in revenue in the first quarter. This helped offset some of the decline in its drug Humira, revenue from which fell 5.6% to $4.5 billion.
Earnings per share came to $2.14 in the first quarter, rising by 14% and beating consensus estimates. AbbVie further guided for earnings per share in the range of $8.73 to $8.83 for the full year, and we see the company earning the midpoint at $8.78. This represents 11% growth over 2018 earnings.
Growth prospects
We see AbbVie’s growth outlook as bright given that its pipeline of new drugs is robust and that the company has offered to buy Allergan (AGN) in a blockbuster deal that is transformative for AbbVie.
On its own, however, we see AbbVie’s growth prospects as strong considering that it has a full pipeline of new drugs, such as Imbruvica, that are growing revenue rapidly to help offset Humira declines. That drug is slowly losing patent protection around the world and should generate little to no revenue in the next few years. As Humira hits its patent protection cliff, AbbVie has been busy ramping production of new drugs to fill the void.
We see AbbVie growing from a small amount of revenue increase as new drugs offset Humira, but margin expansion should remain a factor. Pharmaceuticals have very low variable costs, meaning that when revenue rises, margins generally follow suit. This should continue to be a tailwind for earnings growth for AbbVie, as it has been in recent years.
In addition, it continues to buy back large blocks of its own stock. Not only does this reduce the float – and thereby boost earnings per share – but it also is being done at very favorable valuations. We thus believe this is a terrific use of capital at present, and AbbVie’s share count should be down in the mid-single digits this year.
While we see AbbVie’s standalone growth as attractive, it is even more so with the addition of Allergan. AbbVie is offering 0.866 AbbVie shares and $120.30 in cash for each share of Allergan, which was a 45% premium to Allergan’s market price prior to the transaction. This is a steep price to pay, but given that AbbVie shares have fallen 13% since the announcement, the deal is currently significantly cheaper than it otherwise would be.
From a growth perspective, AbbVie expects Allergan to help find synergies in the R&D space, as well as with marketing and SG&A costs. Indeed, the company expects at least $2 billion in synergies by year three, excluding any additional synergies from revenue growth.
The combined companies would generate around $30 billion in revenue next year and produce high single-digit sales growth annually for the foreseeable future. Not only is this attractive on an absolute basis, but it is even more so for AbbVie shareholders worried about the decline in revenue from Humira. Indeed, we like this transaction for a variety of reasons, but specifically because it addresses AbbVie’s biggest concern as Humira sales decline.
Given all of this, we think AbbVie can reasonably grow earnings at a rate of at least 9.5% annually in the coming years, with upside potential after Allergan is fully integrated.
Valuation and expected returns
AbbVie’s earnings per share have nearly tripled just since 2013, based upon guidance for this year. That level of growth is outstanding, but we also see it as somewhat unsustainable. As mentioned, we see 9.5% annual growth going forward. However, that is still quite robust and plenty of reason for investors to consider owning the stock.
Today, the stock trades for just 7.4 times this year’s earnings estimates, which is the cheapest valuation AbbVie has ever traded for as a standalone company. This is just 60% of our estimated fair value at 13 times earnings. Combined with the high dividend yield, we see a lot of reasons to like the stock.
Total annual returns for AbbVie would consist of the following, based upon our estimates:
- 9.5% earnings-per-share growth.
- 6.3% dividend yield.
- 10.9% multiple expansion.
Thus, we expect AbbVie to return more than 25% annually through 2024.
Final thoughts
AbbVie represents a very cheap, very high-yield stock to gain exposure to the ever-growing pharmaceutical sector. We like AbbVie whether the Allergan transaction is consummated or not, but we like AbbVie even more assuming it does.
We see robust growth from AbbVie’s non-HUMIRA pipeline in the coming years, which will help fuel dividend growth and share repurchases. We also like Allergan’s growth prospects and the synergies the combined companies would achieve, which would boost margins.
Given the high yield, cheap valuation, strong growth prospects, and the Allergan transaction, we see a lot of reasons to like AbbVie, and rate it a buy.
Disclosure: I am long AbbVie.
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