Adjustments were recently made to the list of Dividend Aristocrats, as is done in most years. To qualify, companies in the S&P 500, must have increased annual dividends for a minimum of the last 25 years. Generally there are a few adjustments made to the list each year. This year two excellent companies were added, AbbVie (ABBV) and Chevron (CVX), with high yields and histories of more than a century.
Abbott Labs (ABT), a Dividend Aristocrat with a 125-year history and 40 years of increasing annual dividends, split into 2 businesses effective January 1, 2013. It spun off ABBV, a global research-based biopharmaceutical company, with $18 billion in revenue, which has advanced therapies products for complex and serious diseases. The medicines are used to treat rheumatoid arthritis, psoriasis, Crohn's disease, HIV and cystic fibrosis. For future business, ABBV has a pipeline of medicines, including more than 20 compounds in Phase II or Phase III development in immunology, renal care, hepatitis C, women's health, oncology, and neuroscience (including multiple sclerosis and Alzheimer's disease).
Sales for the top medicines in 2012 were (in billions of dollars):
A majority of its business is in the U.S. (in billions of dollars):
Sales by geography
The largest foreign markets (each accounts for more than 4% of sales) are: The Netherlands, Germany and Japan,
Clearly HURIMA is the top product. After being introduced in 2003, 47% of sales are in the U.S. It is also sold in more than 60 countries. HUMIA treats: rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn's disease, Plaque psoriasis, juvenile idiopathic arthritis, ulcerative colitis, Axial spondyloarthritis and pediatric Crohn's disease. The company is doing substantial R&D to expand use for HUMIRA in rheumatology, gastroenterology, dermatology and ophthalmology. U.S. patent protection is due to expire in 2016 and in the E.U. it will expire in 2018.
HUMIRA sales growth is coming from: expanding the patient base by applying for regulatory approval for new applications, treating additional medical conditions and expanding its presence in underserved markets (such as Brazil, China, Mexico and Russia). Continued penetration of HUMIRA and other leading products from ABBV should drive growth in these markets.
The pipeline of new medicines at ABBV for unmet medical needs includes: hepatitis C, multiple sclerosis, endometriosis, Parkinson's disease, cancer, schizophrenia, Alzheimer's disease, uterine fibroids and renal disease.
This is an unusual business. It has a long history of selling products and is also a new company. It was rated as a Dividend Aristocrat because ABT has been raising annual dividends for 4 decades. In its first year as a standalone business, ABBV is doing well. Q2 sales rose 4.4% to $4.7 billion and HUMIRA sales grew 12.1%. Management raised 2013 adjusted EPS guidance to $3.07-$3.13 (GAAP EPS guidance is $2.66-$2.72). The $1.60 dividend is well covered and the 15X P/E is moderate. At $45.33, the stock yields 3.5%.
CVX origins go back to Rockefeller's Standard Oil Company. In 1911, the Supreme Court divided Standard Oil into 34 companies. Standard Oil Company (California) was one of those companies and the name was changed to Chevron in 1984. There have been numerous acquisitions in the last century including Gulf Corp and Tenneco's (TEN) US Gulf of Mexico crude oil and natural gas properties. Then in 2001 it merged with Texaco to become the second-largest U.S. based energy company.
The $230 billion business is divided between Upstream and Downstream. Income is shown below:
Last year CVX produced 2.6 million barrels per day, with about 75% of the volume from more than 20 countries outside the U.S. Major new projects include first production in Nigeria and in the Gulf of Mexico, continued increasing production at 2 projects in the Gulf of Mexico, and 2 projects in Nigeria, expansion of the Caspian pipeline in Kazakhstan, and Russia, and progressed construction of the Gorgon Project in Australia (more than 55% complete). CVX was awarded $17 billion in contracts at the Wheatstone Project in Australia. Final investment decisions were reached on in Angola, the Angola-Republic of the Congo Joint Development Area, Bangladesh and Hebron in Canada.
The Downstream activities include refinery upgrades, construction on the $1.4 billion Pascagoula Refinery and a catalytic cracking unit at the 50%-owned Yeosu Refinery in South Korea. In the Chemical division: production began at an olefins and derivatives facility in Saudi Arabia (35% owned by Chevron Phillips Chemical), construction began on a 1-hexene plant in Texas (50% owned), and the start of an additives manufacturing plant in Singapore.
2013 outlays are projected at $36.7 billion versus $34.2 billion last year. The 2013 Upstream capital budget is $33 billion: 10% for exploration activities, 60% for major capital projects and 30% for continued development of the base business. CVX plans to invest $3.4 billion in exploration and wells in Suriname, Iraq, Morocco, and Sierra Leone, along with continued activity in Western Australia, the Gulf of Mexico, West Africa, and shale gas regions around the world. In early 2013, CVX acquired shallow-water acreage off China, and signed agreements for exploration offshore Morocco, and South Africa.
The company's presence in the downstream industry is refining, marketing, trading and transporting of hydrocarbon products and petrochemicals. Key objectives include: projects to improve refinery feedstock flexibility, investments for high-value yield and energy, and projects in chemicals and base-oil manufacturing businesses to add to global capacity.
This bulk of the assets for this huge company are in Upstream:
Capital expenditures in the first 6 months of 2013 were $18 billion, versus $14 billion last year. Expenditures for upstream investments represented 92% of the total. Over the next 5 years, CVX will invest in 16 startups with an investment greater than $1 billion each. The 2013 capital and exploratory budget of $36.7 billion, combined with a strong financial position, support a long-term growth strategy. The world needs reliable and affordable energy and CVX will supply energy to create value for stockholders.
Additionally CVX continues buying back Treasury stock. In Q2, CVX purchased $1.25 billion. Last year stock repurchases were $5 billion. Few companies on earth have that financial strength. Purchases of stock will continue. CVX has long-term debt of $12 billion backed by almost $137 million in equity (after $34 billion in Treasury stock). At $124.07, the P/E of 10X is modest and the $4 dividend provides a 3.2% yield rate.
These two Dividend Aristocrats offer attractive yields and rising income for investors. CVX is proud of its average dividend increase of 11% since 2004 (including an 11% increase this year). ABBV is a different kind of company. It has a long track of growing a medical business while it is also a new company. Supplying medical products for improving healthcare around the world holds promise for the future. Growing earnings will bring higher annual dividends. The two companies have been growing for more than a century and are committed to continue rewarding stockholders.