Updated on April 22nd, 2024 by Bob Ciura
At Sure Dividend, we believe long-term investors should focus on the highest-quality dividend growth stocks. Broadly speaking, these are companies with long histories of raising their dividends, and the competitive advantages and growth potential to fuel continued dividend growth in the years ahead.
Therefore, we tend to steer investors toward the Dividend Aristocrats, a group of 68 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases. We have compiled a complete list of all Dividend Aristocrats, along with relevant financial metrics such as dividend yields and price-to-earnings ratios.
You can download your free list of all the Dividend Aristocrats by clicking on the link below:
Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.
We review each of the 68 Dividend Aristocrats every year. The next stock to be reviewed in this year’s edition is AbbVie (ABBV).
AbbVie is coming off a multi-year period of excellent growth, thanks to the massive success of its flagship product Humira. There are questions regarding the company’s future growth due to increasing competition for Humira in the U.S. and Europe, but the company has a plan to continue its growth in the long run.
This article will discuss AbbVie’s business model, growth potential, and valuation.
Business Overview
AbbVie is a global pharmaceutical giant. It has a $300 billion market capitalization, meaning it is a mega-cap stock.
AbbVie began trading as an independent company in 2013, after it was spun off from fellow pharmaceutical Dividend Aristocrat, Abbott Laboratories (ABT).
AbbVie has generated strong growth since the spin-off. Thanks to success with drugs such as Humira, the company grew revenue and adjusted EPS by 14% and 18%, respectively, from 2013 to 2022.
Additional Resource: Stock Spin-Off Calendar from Stock Spin-Off Investing.
AbbVie is a pharmaceutical products company that is focused on a couple of key treatment areas, including immunology, oncology, and neurological health
Source: Investor Presentation
Thanks to the growth it experienced since it was spun off, AbbVie now generates annual revenue of around $58 billion.
AbbVie’s most important product is Humira. Humira is an immunology drug that is used for the treatment of rheumatoid arthritis, Crohn’s disease, and several additional indications, and that has been the top-selling drug in the world for a couple of years.
The challenge for AbbVie is that Humira is now facing biosimilar competition in Europe and the US (since January 2023).
AbbVie reported its fourth-quarter and full-year earnings results on February 2nd. Revenue came to $14.3 billion for the quarter, which was 5% less than the same quarter of the previous year.
Revenue was positively impacted by growth from some of its newer drugs, including Skyrizi and Rinvoq, while Humira sales declined due to patent expiration.
AbbVie earned $2.79 per share during the fourth quarter, down 22% year-over-year. The company expects to earn $11.05 – $11.25 on a per-share basis for 2024. Earnings per share will be relatively flat compared to 2023.
Growth Prospects
The major risk for global pharmaceutical manufacturers is patent loss. When a particular drug loses its patent, the market is typically flooded with competition, especially for the world’s top-selling products.
For AbbVie, its biggest risk is the competition about to hit its flagship drug Humira, a multi-purpose drug that is used to treat rheumatoid arthritis, plaque psoriasis, Crohn’s disease, ulcerative colitis, and more.
Humira at one point generated over half of AbbVie’s annual sales. Loss of patent exclusivity in the US in early 2023 is a significant overhang.
Going forward, AbbVie expects to return to growth from its expanded portfolio. The company prepared for the loss of patent exclusivity on Humira, by investing heavily in new products as well as acquisitions to boost its growth.
For example, Rinvoq and Skyrizi are two additional products that represent long-term growth catalysts.
Source: Investor Presentation
AbbVie’s $63 billion acquisition of Allergan also remains a source of future business and earnings growth.
Allergan’s flagship product is Botox, which diversifies AbbVie’s portfolio with exposure to global aesthetics and neurological indications. Both of these markets continue to experience growth, thereby allowing AbbVie to benefit from growing spending in these areas.
Overall, we expect 3% annual EPS growth from AbbVie over the next five years.
Competitive Advantages & Recession Performance
The most important competitive advantage for AbbVie, and any other pharmaceutical company, is its patent portfolio. Pharmaceutical giants need to spend heavily to innovate new drugs and therapies when one of their blockbusters loses patent protection.
AbbVie, like many of its peers, spends billions on R&D every year. Thanks to that heavy spending on new therapies, AbbVie is well-positioned in growth markets such as oncology and immunology.
The company has a large number of new products in various stages of development.
Source: Investor Presentation
AbbVie was not a stand-alone company during the last financial crisis, so there is no recession track record, but since sick people require treatment whether the economy is expanding or contracting, it is highly likely that AbbVie would continue to perform well during a recession.
The COVID pandemic has not impacted AbbVie negatively, as the company hit new record profits in 2020, 2021, and 2022.
Even if AbbVie’s earnings were to decline slightly in a recession, the dividend should remain secure. AbbVie’s dividend payout ratio is approximately 56% expected for 2024.
Valuation & Expected Returns
AbbVie is expected to generate adjusted EPS of $11.15 for 2024, at the midpoint of guidance. At this EPS level, the stock is currently trading for a price-to-earnings ratio of 15.0. AbbVie is valued considerably below the S&P 500 Index.
Our fair value estimate for AbbVie is a price-to-earnings ratio of 12.0, due to increasing leverage from the Allergan acquisition and the Humira patent exclusivity that expired. These are continued overhangs on the company’s earnings growth potential.
As a result, we view AbbVie as slightly overvalued. A compressing P/E multiple could decrease shareholder returns by approximately 4.4% per year over the next 5 years.
In addition, we expect annual earnings growth of 3% through the next five years. Lastly, the stock has a current dividend yield of 3.7%.
In total, we expect annual returns of around 2.3% per year over the next five years, making AbbVie stock a sell.
Final Thoughts
AbbVie is a high-quality business, with a strong pharmaceutical pipeline and long-term growth potential. It is also a shareholder-friendly company that returns excess cash flow to investors.
The near-term outlook is murky, as AbbVie faces a significant challenge in replacing lost Humira sales from losing patent exclusivity.
While the company has prepared for this with heavy R&D investments, earnings-per-share growth has stalled in the past few years.
With expected returns below 3% per year going forward, even including the dividend yield, AbbVie stock is rated a sell right now.
If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: