Summary on AbbVie – An Undervalued Dividend Aristocrat      

• AbbVie Inc (ABBV) has an established eight-year track record of producing outstanding returns and superior dividend growth.
• Created a solid growth platform consisting of industry-leading drugs, a robust pipeline that is positioned to mitigate the impact of biosimilar competition.
• Strong cash flow will enable ABBV to deleverage the balance sheet and support a growing dividend.
• Earnings per share are forecasted to increase 14.3% annually over the next two years so that investors would be rewarded with current income, dividend growth, and capital appreciation.
• AbbVie is an undervalued Dividend Aristocrat, offers a generous yield of roughly 4.5%, is currently trading in the margin of safety, and represents a buying opportunity. 

Investment Thesis

Since the Abbott Laboratories (ABT) spinoff in 2013, AbbVie Inc. (ABBV) has rewarded shareholders by producing an 8-year total return CAGR of 20.15% and a dividend CAGR of 16.71%. These superior results are among the top 20% of dividend growth companies. I will explain in this article why I view AbbVie as an undervalued Dividend Aristocrat.

Source: Portfolio Insight

During the past eight years, ABBV attempted to transform itself from depending on one drug (Humira), accounting for 60% of its revenues and facing the loss of patent protection (loss of exclusivity) that arguably placed ABBV’s dividend safety at risk. Through a series of negotiated transactions, ABBV delayed these impacts until 2018 in Europe and 2023 in the U.S.  

ABBV made several key acquisitions, broadened its product line, created a robust pipeline to reduce its dependence on Humira, and mitigate the impact of competition from biosimilars. More recently, the market has damped the expectations for ABBV because of the debt load needed to fund the Allergan acquisition and the cash flow that would be required to deleverage the balance sheet and support a growing dividend going forward.

Analysts’ estimates forecast EPS growth of 18.2%, 10.4%, for FY 2021, FY 2022, respectively. ABBV is currently trading in the margin of safety and offering a yield of about 4.5%.  I will describe why I believe AbbVie represents a strong buying opportunity and I view it as an undervalued Dividend Aristocrat.

Brief History of ABBV

Abbott Laboratories (ABT) viewed the pharmaceutical business (ABBV), and its core medical products and device business as having different risk profiles and therefore were essentially two separate businesses. After a thorough study, the Board of Directors decided to spinoff the pharmaceutical business effective January 2, 2013. The blockbuster drug Humira accounting for over 60% of the newly formed company’s revenues & profits, was facing the threat of biosimilar competition within a few years.  

For the past eight years, ABBV has attempted to lessen its dependence on Humira while simultaneously preparing for the patent losses from Humira, both internationally and domestically. The transformative acquisition of Allergan (completed in May 2020) positions ABBV for enhanced long-term growth potential, a growing dividend and investment in innovation in each of its therapeutic categories.

ABBV Today: Business Profile

AbbVie is a global, research-based biopharmaceutical company. AbbVie develops and markets advanced therapies that address some of the world’s most complex and serious diseases. AbbVie’s products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology, and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie also has a pipeline of promising new medicines in clinical development across such important medical specialties as immunology, oncology, and neuroscience, with additional targeted investment in cystic fibrosis and women’s health.

Source: AbbVie Investor Presentation

As of December 2020, ABBV’s product portfolio consisted of eight blockbuster drugs, each producing more than $1 billion in revenues. Based on ABBV’s FY 2021 Q1 earnings call, the company expects to receive FDA approval on five drugs in 2021 and seven drugs in 2022. 

Dividend Aristocrat Status

ABBV is a member of the Dividend Aristocrats based on the status of its former parent Abbott Laboratories (ABT). Many dividend-growth investors use this dataset to source buying opportunities. 

Source: Portfolio Insight

As of December 31, 2020, there were 66 Dividend Aristocrats. This chart ranks each member’s 5-year total return performance and compares it to the S&P index. As highlighted on the chart, ABBV’s total return was 18.8% vs. 16.23% for the S&P index and placed in the top quartile of all Dividend Aristocrats during the previous five years. 

The chart below ranks the 5-year dividend CAGR for the Dividend Aristocrats. 

Source: Portfolio Insight

ABBV produced the third-highest dividend CAGR of 18.2% among the Aristocrats and outperformed the S&P at 5.17% during the previous five years.

A seven-year journey has created a company well-positioned to grow its business, expand the product line with a series of blockbuster drugs, and continue to develop a robust pipeline while finally lessening its dependence on Humira. 

Let’s examine the historical results and the analysts’ estimates through 2022 for the “new” ABBV.

Key Performance Metrics

The darker blue results indicate superior performance against all North American stocks, with the lighter blue displaying above-average performance. The Non-GAAP EPS results have been quite impressive, based on the latest CAGRs. Also, Management increased the FY 2021 EPS guidance in its May 1, 2021 news release.

The analysts’ latest EPS estimates through 2022 are shown in the above chart. These estimates show that ABBV would be trading at a P/E ratio of 8.94 (FY2021) and 8.1 (FY2022). These low multiples would suggest the company looks to be undervalued compared to any reasonable P/E multiple. Since ABBV has a history of outperforming analysts’ estimates, I would reasonably expect the FY 2021 and FY 2022 EPS estimates to be surpassed. 

The full impact on Humira’s revenues from biosimilars is one of the critical issues that concern the market.

Source: Portfolio Insight

The latest year’s revenues have been impacted by the Humira biosimilar competition internationally. FY2020 shows the positive impact of the Allergan acquisition beginning to come online and the negative impact of Covid-19 on elective procedures.  The effect of loss of exclusivity will likely be felt starting in 2023. 

Source: Portfolio Insight

Management’s plans call for reducing the dependency on Humira from 60% of the revenues to 40% of revenues by the end of FY2022 while establishing a robust platform for significant growth. 

Skyrizi and Rinvoq have demonstrated differentiated clinical profiles compared to Humira and are expected to lower AbbVie’s dependence on Humira. With many new indications expected in the next couple of years, sales of Skyrizi and Rinvoq could be higher and have the potential to replace Humira when generics are launched in 2023.

ABBV has consistently performed among the best companies in rewarding its shareholders with dividend increases. 

Source: Portfolio Insight

The historical dividend growth performance has been outstanding since 2015, particularly with the superior performance (deep blue shading) in the 3 & 5-year CAGRs. The Board has indicated its intent to funding additional dividend increases based on its confidence to generate superior results. Forecasted FY2021 dividend payments are shown in the chart, an increase of 10.17% effective February 2021. 

Earnings Based Fair Value

Let’s examine the historical Fair Value chart for ABBV based on earnings.

Source: Portfolio Insight

There are various approaches that investors use to estimate the fair value of a particular stock. Typically, I use the historical P/E-based approach inspired by Benjamin Graham, and more recently, the Dividend yield-based approach by Geraldine Weiss described in her book, Dividends Don’t Lie. We tend to use these approaches as a proxy to help shape our view about what we expect to happen.

The fair value range is tailored to each stock’s historical median P/E multiple (blue dotted line) and then smoothed to form a channel that contains 50% of the historical P/E multiples for the specific stock.

Based on the above chart, AbbVie is currently trading in the margin of safety and hence I view it an undervalued Dividend Aristocrat.

Risk Assessment

Management will have to deliver on the EPS forecasts, especially during the next two years. Management’s credibility will be tested.

ABBV must generate the necessary cash flow to reduce debt by at least $15 billion to $18 billion (forecasted by management) and continue to fund dividend growth. 

The Allergan acquisition has been forecasted to be accretive to earnings, at least 10% in year one and 20% after year two. 

Maintain the Dividend Aristocrat rating is essential to ABBV’s future success. 

Continue to expand the robust pipeline and meet the targets for the newly launched blockbuster drugs such as Rinvoq and Skyrizi. 

Pharma pricing was a significant discussion point before the recent election. It’s not clear how the new administration will consider this topic. But the Pharma companies will feel pressure to modify the pricing. 

Final Thoughts on AbbVie: An Undervalued Dividend Aristocrat

ABBV is an undervalued Dividend Aristocrat that has produced double-digit growth in both total returns and dividend increases since 2013 and outperformed its peer group and the S&P index.

As a result of its eight-year journey, ABBV has created a company that has introduced a series of blockbuster drugs, established a robust pipeline, and well-positioned itself to mitigate the impact of biosimilar competition with its growth platform. 

ABBV currently offers a generous ~4.5% dividend yield and trades in the margin of safety. ABBV offers current income, dividend growth, and an opportunity to realize capital appreciation for the dividend growth investor. This situation represents the classic definition of total return.