2021 Week 4: AbbVie Inc (NYSE: ABBV)

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The capital allocation for the week of 01/24/2021 to 01/30/2021 will be used to establish a position in AbbVie Inc (NYSE: ABBV).

ABBV – Company Profile

AbbVie (ABBV) is a biopharmaceutical company founded in 2013 as a spin-off of Abbot Laboratories. The company develops and sells treatments in the areas of: immunology, hematologic oncology, aesthetics, neuroscience, eye care, women’s health and others. It’s best known products are Humira and Botox. Official Site | Wikipedia

Dividend Streak49* years (9 years)
Yield (TTM)4.37%
Payout Ratio48.16%** (reported 112%)
P/E11.31** (reported 23.37)
Minimal Entry Criteria Scorecard

* includes the dividend streak for ABT before ABBV was spun off
** computed using TTM adjusted EPS of $9.80 as of Q3 2020


Does ABBV have the financial means to sustain and raise its dividend going forward?

Since before becoming an independent company in 2013, ABBV has been posting an impressive track record of year-over-year revenue increases. Net earning (GAAP basis) have been a bit less consistent. However, the main source of inconsistency in net earnings over the years have been non-cash and one time expenses.

EPS based on GAAP income shown similar trends as the net earnings. However, adjusted EPS have shown a consistent trend of year-over-year increases since 2013. (Adjusted net income excludes one time expenses and revenue.)

For 2020, ABBV has posted impressive revenue growth. For the first 9 months ending 09/30/2020 revenues totaled $31.9 billion compared to $24.56 billion for the same period in 2019. Net income continued to be a complex story. Net income on a GAAP basis was materially impacted by non-cash expenses related to mergers and acquisition. Adjusted net earnings for the first 9 months of 2020 were $12.56 billion compared to $10.03 billion for the same period in 2019. The revenue and net income numbers for 2020 have been boosted by the acquisition of Allergan on May 8, 2020. On the other hand, the COVID-19 pandemic has not had a material impact on financial results.

Going forward one of the biggest risk to the company’s financial performance is the patent expiration of Humira. The drug has already lost patent protection in Europe and will go off patent in the US in 2023. ABBV has shown an ability to replace lost revenue from Humira with revenue from new products. In 2020 it launched 2 new products in the immunology area and has seen strong growth for Imbruvica its leading hematologic oncology treatment.


Are we paying too much for ABBV at the current share price?

Since becoming a independent company, ABBV’s PE ratio (based on GAAP earnings) has seen a low of 9.88 and a high of 63.95, with a media value of 20.06. (source GuruFocus). Currently, the shares trade at a PE ratio of 23.44 based on GAAP earnings and a PE ratio of 11.31 based on adjusted earnings.

The current share price of $110.86 is 5.5% above the 50-day moving average and 17.4% above the 200-day moving average. The price is also close to the 52-week high of $113.41.

The share price has seen a runup in recent months and is near an all time high and could see some declines in the short term. However, on a PE basis it is in line with historical values.


How does the current dividend yield compare to historical values?

Over the last decade, ABBV’s yield has been in a range of 0.85% to 6.38%, with a median of 3.38%. (source GuruFocus) The current TTM dividend yield of 4.37% is in the upper half of the range, and compares favorably to historical values.

Additionally, ABBV announced an increase of the quarterly dividend to $1.30/share from $1.18/share. The increase makes the forward looking yield 4.69%.


Why are we adding ABBV to the FiveTwenty portfolio?

Since becoming a standalone company, ABBV has grown dividends quickly. The median 3-year average dividend growth rate is 18.3%. (source GuruFocus) Even though, the stock price has experienced a considerable run-up in recent months, the current yield and valuation still offer an attractive entry point.

The Humira patent situation puts downward pressure on revenues in the next few years. However, we believe the existing product pipeline will allow the company to continue growing revenues and earnings. That will in turn allow it to finance future dividend hikes.

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