The 8 Best Dividend Stocks In May 2019: What To Buy Now

Despite its weak fiscal second quarter, Walgreens has a positive long-term growth outlook. Even in a difficult period, Walgreens grew its retail pharmacy sales by 7.3% last quarter. Prescriptions and pharmacy retail will benefit from the aging U.S. population and a corresponding need for more healthcare services.

Walgreens also has a plan to revitalize performance in its core retail pharmacy operation, through investments in digital capabilities and a renewed focus on cost efficiency.

WBA Retail

 

Source: Investor Presentation

Despite the challenge posed by online retail competition, Walgreens should navigate the difficult operating climate thanks largely to its competitive advantages. Primarily, Walgreens’ competitive advantage is its leading market share. Its robust retail presence and convenient locations encourage consumers to use Walgreens instead of its competitors. This brand strength means customers keep coming back to Walgreens, providing the company with stable sales and growth.

Another appealing aspect of Walgreen’s business model is that it is resistant to recessions. Consumers are unlikely to cut spending on prescriptions and other healthcare products. Walgreens’ adjusted earnings-per-share declined by just 7% during 2009 – the worst of the global financial crisis – and the company actually grew its adjusted earnings-per-share from 2007 through 2010, following this up with over 20% earnings growth in 2011.

Based on the company’s revised guidance, Walgreens is expected to generate earnings-per-share of $6.02 in fiscal 2019. The stock has a price-to-earnings ratio of 8.7x, well below our fair value estimate of 13x. Expansion of the price-to-earnings ratio to 13x over five years could add 8.4% to Walgreens’ annual returns. In addition, we expect Walgreens to grow earnings by 6% per year, and the stock has a 3.3% dividend yield. Overall, Walgreens stock has expected returns of 17.7% per year over the next five years.

Best Dividend Stock #1: AbbVie (ABBV)

  • Dividend Yield: 5.6%

AbbVie is a global pharmaceutical company with annual revenue in excess of $32 billion. AbbVie’s most important product by far is Humira, which by itself represents ~60% of the company’s annual revenue.

AbbVie has a long history of dividend growth. Going back to its pre-spinoff days as a subsidiary of Abbott Laboratories (ABT), AbbVie is a Dividend Aristocrat. AbbVie has a highly secure dividend payout. We gave an update on AbbVie’s dividend safety after the company reported 2018 financial results, which is discussed in greater detail in the following video:

 In late April, AbbVie reported (4/25/19) its 2019 first-quarter earnings results. Revenue of $7.8 billion increased 0.4% on an operational basis (excluding currency). Humira dragged AbbVie down last quarter, with a 5.6% sales decline. Revenue growth and share repurchases contributed to another quarter of double-digit earnings growth. AbbVie’s adjusted earnings-per-share increased 14% for the quarter, to $2.14.

AbbVie’s biggest near-term risk is patent loss of Humira, which is facing biosimilar competition in Europe. Sales of Humira in the international markets declined 23% on an operational basis last quarter, due to significant price discounting. Humira will face biosimilar competition in the U.S. in 2023.

Fortunately, AbbVie continues to perform well overall and has a plan to pursue growth outside Humira.

ABBV Products

 

Source: Investor Presentation

For example, Imbruvica is another potential blockbuster drug for the company. Imbruvica grossed sales of $1.02 billion, up 34% from the same quarter last year. AbbVie’s hematologic oncology portfolio grew revenue by 43% last quarter. In all, AbbVie expects non-Humira product sales to exceed $35 billion by 2025.

For 2019, AbbVie expects earnings-per-share in a range of $8.73 to $8.83, representing 11% year-over-year growth at the midpoint of guidance.

AbbVie operates with strong safety metrics. It has an expected dividend payout ratio of 49% for 2019, which indicates a secure dividend with room for continued increases even if earnings stall temporarily.

Based on expected earnings-per-share of ~$8.78, AbbVie stock trades for a price-to-earnings ratio of 8.8. Our fair value estimate for AbbVie is a price-to-earnings ratio of 13.0, indicating the stock is undervalued. An expanding P/E multiple could boost shareholder returns by approximately 8.1% per year if the stock valuation expands to our fair value estimate over the next 5 years.

In addition, we expect annual earnings growth of 9%-10% through 2024. Lastly, the stock has a current dividend yield of 5.6%, a very high yield resulting from both a declining share price and the company’s high rate of dividend growth. In total, we expect annual returns above 23% per year over the next five years, making AbbVie our best dividend stock for May 2019 in terms of dividend risk and expected returns.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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