AbbVie Inc. (ABBV) discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company was created in 2013, when Abbott Laboratories split into two companies – Abbvie and Abbott. Abbvie continued raising dividends to shareholders for the five years since becoming a separate publicly traded company. The company is a dividend aristocrat., with a 48 year track record of annual dividend increases.
GAAP Earnings per share have been largely flat since 2013. The company does provide reconciliation between GAAP and non-GAAP earnings however. The non-GAAP earnings have been increasing.
However, Abbvie is expecting GAAP adjusted earnings per share of $10.47 - $10.49/share in 2020. Based on those forward earnings, the stock seems attractively valued today.
The downside with Abbvie is that the company generates 40% of its sales and a larger share of profits from a rheumatoid arthritis drug called Humira. The drug’s patent expired in 2016 in the US and in 2018 in the European Union. However, due to the drug being a bio-similar, there are over 70 patents that provide some intellectual property protection until sometime in 2022 according to Abbvie.
Humira sales have been growing rapidly, and will likely continue going strongly, until competitors catch up to it. It is possible that sales can continue growing at a healthy clip until 2022, after which they will start decreasing as competitors nibble at Humira’s market share. If the market it serves expands, or there are new uses for the drug, it is possible that sales can actually be maintained, even if we have increased competition.
I do not like the huge reliance on a single product, because it decreases the margin of safety factor. I also do not like the fact that this product will certainly face higher competition in the years to come. The third fact I do not like is that I do not see another blockbuster drug that will replace Humira’s sales after 2022. While there are many compounds in different stages of clinical trials, it would take several new drugs to compensate for the eventual loss of Humira’s sales.
As a dividend investor, I need growing earnings in order to have growing dividend income. If the current business model cannot be forecasted into the future, it may mean that the company may not be the type of buy and hold investment that can be safely be tucked into your portfolio. It may need more monitoring.
On the other hand, others may argue that these headwinds are already priced into the shares. As a result, despite the problems that are expected to occur in the 2020s, investors will do ok and enjoy a high dividend income in the meantime.
Abbvie acquired biotech firm Allergan un 2020 in a transaction valued at $60 billion, paid in cash and stock. This deal will allow Abbvie to diversify its revenue stream away from blockbuster drug Humira, which accounts for a very large portion of revenues and earnings. Humira is losing its exclusivity in the US after 2023. This deal will also bring in synergies, and bring in new drugs in various stages of development. The synergies will be mainly from a reducing duplication in SG&A, R&D, and consolidating manufacturing operations. The acquisition price is roughly half what Allergan was going for, when Pfizer walked out of its deal to acquire it a few short years ago. It will reduce the revenues derived from Humira from 60% to 40%. This analysis of cash-flows is not taking into consideration any cost savings that will be generated by eliminating duplicate functions in corporate departments, R&D and manufacturing. However, it also doesn't take into consideration increased interest expenses, due to higher debt.
The company did a lot of share buybacks after the split from Abbott in 2013. However, the number of shares reached 1.673 billion in 2020, after the completion of the Allergan acquisition.
The annual dividend per share has increased from $1.60/share in 2013 to $4.72/share in 2020. Back in October 2020, the company raised quarterly dividends by 10.20% to $1.30/share. This brings the annual dividend to $5.20/share.
The dividend seems adequately covered based on forward earnings for 2020. The forward dividend payout ratio comes out to 57%. However, if earnings per share over the next decade end up falling off a cliff if Humira sales start decreasing, the dividend may be in a dangerous territory sometime in the latter part of the next decade.
I find Abbvie to be attractively valued today at 9.08 times forward earnings and yields 4.57%. While the future is unclear as to where future growth in sales will be generated after Humira, the stock can still deliver solid returns in the near term. The integration with Allergan could generate synergies, diversification and a much-needed boost to future pipeline. That’s at the expense of integration risk and higher debt. Some may argue that the future uncertainty is somewhat priced in the stock already. That being said, the stock could still provide good entry points for investors on bad news. Given the recent seal of approval by no other but the Oracle of Omaha, I decided to initiate a position in the stock for the newsletter.
Abbvie is a company that needs closer monitoring, because it is not the type of business where future growth can be taken for granted. On the other hand, the dividend seems sustainable at the moment, and will likely grow for the next four - five years at a high single digit rate. Investors today need to decide for themselves whether the current valuation is attractive enough to outweigh future risks. Either way, investors are getting paid generously to hold onto their Abbvie shares.
