AbbVie: A Cheap Dividend Aristocrat Yielding Over 4%

AbbVie (ABBV) is one of the more controversial stocks on the dividend aristocrats list for several reasons. As a relatively new spin-off (2013), the company has a much shorter dividend growth track record than traditional aristocrats.

The bigger issue, however, is AbbVie’s profit drivers. Most dividend aristocrats possess the characters we desire when searching for safe dividend stocks. They have entrenched market positions, compete in slow-changing industries, and generate cash flow from many different products and industries.

In AbbVie’s case, over half of its business is concentrated in one product. While this can work for some companies that have powerful brands (e.g. Clorox or Coca-Cola), it’s a risk in AbbVie’s market of branded pharmaceutical drugs and makes the stock less desirable for our Top 20 Dividend Stocks portfolio.

However, the stock’s safe 4.1% dividend yield, relatively cheap forward earnings multiple of 11.1, and above-average earnings growth prospects over the next few years make it worth a closer look.

Business Overview

AbbVie was spun off from Abbott Laboratories on January 1, 2013, as a standalone biopharmaceutical company. Approximately 61% of the company’s revenue comes from sales of Humira, a drug that treats arthritis. Some of its other major drugs are Imbruvica, which treats leukemia, and Viekira, which treats hepatitis C. The company reported nearly $23 billion in sales last year and sells its drugs in over 170 countries.

Business Analysis

The branded pharmaceuticals industry has extremely high barriers to entry and offers potential for juicy profit margins – AbbVie generated a 33% operating margin last year and targets a 50% margin by 2020. Major pharma players invest billions of dollars and years of time in research and development to commercialize breakthrough drugs.

While the success rate is low, a successful drug can generate billions in profits that are protected for many years as a result of the intellectual property owned by the manufacturer. As seen below, AbbVie’s primary markets combine to reach nearly $200 billion in size, providing the company with many different opportunities for growth.

Source: AbbVie Investor Presentation

AbbVie’s management team expects the company to reach $37 billion in sales by 2020, which would represent more than a 60% increase from 2015’s revenue level. Of this total, roughly half of total sales would come from the company’s arthritis drug Humira, and another 13.5% would come from sales of leukemia drug Imbruvica.

AbbVie also expects to launch over 20 new products by 2020 to reach to its goals and believes that its current pipeline has potential to achieve revenues of nearly $30 billion by 2024. As growth continues, operating margins are expected to expand by 100-200 basis points per year to drive double-digit earnings growth.

The company’s success will hinge on the success of its drug pipeline and its ability to protect cash flows from Humira for as long as possible from biosimilar competitors.

AbbVie’s Key Risks

We prefer to invest in pharmaceuticals that have diversified streams of income from their drugs. It’s very hard for a complete outsider to forecast the timing and profitability of a company’s drug pipeline, so finding businesses with enough diversification helps reduce this risk.