The coronavirus crisis has dealt the U.S. economy a severe blow. It is highly likely the U.S. economy will enter a recession in 2020 as a result. While the stock market has rallied meaningfully off its lows, the S&P 500 Index remains down nearly 10% year-to-date.
Many companies in the hardest-hit industries such as restaurants, retail, and energy have already cut or suspended their dividends. For income investors, the challenge is magnified by the extremely low interest rate environment. Overall, it is not easy for investors to find high dividend payouts that are also secure.
We believe healthcare giant AbbVie Inc. (NYSE:ABBV) is a high-quality blue-chip stock with an attractive 5.7% yield, and a secure payout with room for dividend growth over the long-term. The stock offers investors a rare combination of yield, value, and growth, making AbbVie a buy.
Business Overview & Recent Events
AbbVie is a pharmaceutical company with three major focus areas: Immunology, Oncology, and Virology. AbbVie was spun off by Abbott Laboratories (NYSE:ABT) in 2013 so that it could focus on its particular growth initiatives with its own dedicated management team. AbbVie has generated strong growth in the past several years, thanks in large part to multi-purpose drug Humira, which by itself makes up over half of AbbVie’s current revenue.
This stands to change, as AbbVie has long prepared for a post-Humira future. Humira has already lost patent exclusivity in Europe, which has resulted in significant declines in sales outside the United States. International sales of Humira dropped 13% operationally in the 2020 first quarter. While domestic Humira sales rose 14%, investors need to consider that Humira will lose patent exclusivity in the U.S. in 2023.
AbbVie still performed well overall.Total revenue of $8.6 billion increased 10% year-over-year thanks to contributions from new products, while adjusted earnings-per-share increased 13% to $2.42. Despite the weak start to the year for the U.S. economy, AbbVie registered another quarter of strong growth.
Pharmaceutical Pipeline, Acquisitions To Bring Future Growth
There are worries that losing Humira will land a devastating blow to AbbVie’s annual revenue. Fortunately, the company has invested billions in research and development in the past several years in preparation of Humira losing patent protection. From 2013 to 2019, AbbVie increased its adjusted annual R&D spending by 76%, reaching $5 billion in 2019.
This investment has paid off, as AbbVie will benefit from a strong pharmaceutical pipeline going forward. AbbVie has received 14 major approvals since 2013, with 10 of those approvals inimmunology and oncology. Some of AbbVie’s new products are already making major contributions to the company. For example, in the most recent quarter global Imbruvica net revenue increased 21% to over $1.2 billion. Another high-growth product is Venclexta, whose sales more than doubled last quarter to $317 million.
In addition to its organic growth, AbbVie will supplement its future growth through M&A, specifically the massive $63 billion acquisition of Allergan (NYSE:AGN). Allergan is a pharmaceutical giant focused on four key therapeutic areas including medical aesthetics, eye care, central nervous system, and gastroenterology. Botox is Allergan’s most valuable product, with roughly $3.6 billion in sales last year.
The Allergan deal will transform AbbVie by adding a huge level of diversification. By acquiring Allergan, AbbVie instantly becomes a leader in cosmetic pharmaceuticals. According to AbbVie, the combined entity will generate annual revenue of nearly $50 billion. AbbVie expects the acquisition to boost adjusted earnings-per-share by 10% in the first year upon closing. Taking the company’s various growth catalysts into account, we expect 5%-6% earnings-per-share growth over the next five years, which may be too conservative an estimate if AbbVie’s new products and the Allergan acquisition perform better than expected.
Pillar Of Value And Income
AbbVie is a very appealing stock on the basis of value and income. Indeed, the stock has a fairly low valuation, despite its impressive growth in recent years. It appears the broader market is pessimistic regarding AbbVie’s ability to replace Humira, but in our view this simply presents investors with a long-term buying opportunity.
Analyst consensus is currently expecting AbbVie to earn $9.92 per share in 2020. Based on this, shares of AbbVie trade for a price-to-earnings (P/E) ratio of just 8.4. This is a fairly low valuation, especially for a profitable and growing business. We believe the market is far too negative when it comes to AbbVie’s future prospects. While loss of patent exclusivity for Humira is a lingering concern that may continue to serve as an anchor on AbbVie’s valuation multiple, eventually we believe the stock will earn a higher multiple.
Our fair value estimate for AbbVie is a price-to-earnings ratio (P/E) of 10.5. Therefore, we view AbbVie as undervalued. Expansion of the P/E multiple could boost shareholder returns in the next several years. For example, if AbbVie stock reaches a P/E multiple of 10.5 within five years, annual returns would be increased by 4.6% per year. This shows the benefits of buying undervalued stocks.
In addition, we expect annual earnings growth of 5.5% per year over the next five years. In our view, earnings-per-share growth can be obtained through organic growth as well as the contributions of Allergan, in addition to share repurchases. Lastly, the stock has a 5.6% dividend yield. Overall, we expect total annual returns of 15%-16% per year for AbbVie stock over the next five years.
Final Thoughts
The recent recovery in the S&P 500 is a positive sign, but the U.S. economy is not out of the woods. The coronavirus crisis could lead to a recession in 2020, meaning it is an opportune time for income investors to become more selective. Income investors should try to avoid dividend cuts as much as possible. Therefore, high-quality stocks like AbbVie become even more valuable in uncertain times.
AbbVie has a strong product portfolio, and will be able to generate long-term growth thanks to its impressive pipeline and the Allergan acquisition. With a high dividend yield of 5.6%, AbbVie is a blue-chip dividend stock to buy and hold for the long-term.