Should one consider purchasing AbbVie Shares?
Pharma titan AbbVie (ABBV, 0.87%) has been a powerhouse ever since it separated from Abbott Laboratories in 2012. Over the past decade, the stock boasts an average dividend yield of 3.5% and an impressive 14% annual dividend growth. Why are shareholders grinning from ear to ear?
For the majority of these years, AbbVie garnered tremendous success through Humira. However, after losing patent protection in 2023, the revenue slide began. Over the past two years (excluding dividends), the stock price has only crept up by 6%. Is the company's golden age coming to an end? Or is AbbVie getting ready for another golden stretch? Let's examine whether AbbVie is a worthwhile buy.
One Hurdle, Several Leaps
In the cutthroat pharmaceutical industry, one extraordinary achievement serves as the foundation for a company's success. AbbVie's Humira trial and error is a textbook case. Humira (adalimumab) is an immunosuppressant drug utilized to manage a myriad of autoimmune diseases, where the patient's immune system mistakenly attacks healthy cells. In 2022, sales of Humira reached an astounding $21.2 billion before facing patent expirations in 2023.
Once patents expire, cheaper generic alternatives flood the market. In the third quarter of 2024, Global Humira sales amounted to $2.2 billion, a disheartening 36% decrease year-over-year. Currently sitting at an annualized decline of $8.8 billion, Humira's sales are expected to continue dwindling while biting into the market share.
But every successful sports team strengthens itself by nurturing incoming talent to replace aging stars. That's an accurate metaphor for AbbVie's strategy, as it continues to invest in new products to fill the void as a result of patents expiring.
And the good news is that AbbVie's new immunology drugs Rinvoq and Skyrizi are keeping pace rapidly. Their accomplishments have led to management upgrading their long-term growth projections. Together, Rinvoq and Skyrizi may surpass Humira's best year by 2027, even outpacing the $63.5 billion in projected revenue for 2025, when AbbVie is expected to surpass the $60 billion in sales milestone for the first time.
Dividends May Slow, but Growth Prospects Glimmer Bright
As great as the potential of Rinvoq and Skyrizi might be, Humira's continued declines will put a dent in their growth. Shareholders hoping for substantial dividend increases may need to revise their expectations. Currently, AbbVie's dividend payout ratio stands at 61% of 2024 earnings. While there's plenty of room for future increases, management may want to keep some financial leeway.
AbbVie's pile of debt is impressive, too. With acquisitions totaling $71 billion ($63 billion for Allergan, $10.1 billion for ImmunoGen, and $8.7 billion for Cerevel Therapeutics), the company's ratio of debt to EBITDA is a manageable 3.7. This isn't an unsustainable amount of leverage, but it's also not an ideal situation where you'd want to lock in all your earnings with dividend payouts.
Regardless, the dividend remains significant to AbbVie; it's proudly known as a Dividend King, boasting a multi-decade history of annual dividend increases dating back to when it was still part of Abbott Labs.
Investors can anticipate mid- to high-single-digit dividend growth until the financial house is in better order. That's not such a bad yield when you're looking at a 3.6% starting yield.
AbbVie – A Strong Buy Today
With a solid business poised for long-term growth, coupled with an impressive dividend, is the stock worth investing in today?
Recently, AbbVie faced some hurdles, most notably poor phase 2 trial results for emraclidine, a promising drug for treating schizophrenia, which drove the costly $8.7 billion acquisition of Cerevel Therapeutics. Analysts have since adjusted their long-term growth estimates, but they still expect AbbVie to deliver annualized earnings growth of 8% in the long run.
The stock price dip resulting from the bad news has made its valuation appear more appealing. I maintain that the current price represents fair value (if not slightly below) for this high-yield, high-growth dividend stock.
In conclusion, despite Humira's struggles, AbbVie's long-term prospects seem stronger than most investors are giving it credit for. The dividend remains solid, and share price growth is expected to continue alongside dividend growth over the coming years. That's why I believe AbbVie is a smart buy today.
After examining AbbVie's financial strategy, it's clear that the company is actively investing its resources to develop new products to replace the revenue lost due to Humira's patent expirations. This strategic move, supported by the success of new immunology drugs like Rinvoq and Skyrizi, could potentially surpass Humira's best year by 2027.
Despite the potential growth of Rinvoq and Skyrizi, consider that Humira's declining sales will impact their growth. Shareholders who anticipate substantial dividend increases may need to revise their expectations, as AbbVie's current dividend payout ratio is 61% of 2024 earnings, leaving room for future increases but also maintaining financial leeway.
