AbbVie's Dividend Growth Machine Keeps Rolling

| About: AbbVie Inc. (ABBV)


AbbVie Continued double-digit earnings and revenue growth in 2015.

Management reiterated its long-term guidance of continued growth until 2020.

Management's strategy appears to be to 'grow out of' its debt and have more financial flexibility in coming years.

AbbVie Inc (NYSE:ABBV) is, at this time, one of the fastest dividend growers I know of. This spun-off pharmaceutical has, for a couple years, relied very heavily on sales of Humira, a patented drug used for a handful of ailments. In 2014, almost 2/3ds of the company's revenue came from Humira alone. Fears of imminent competition for Humira have been overblown, and sales for the blockbuster drug have chugged higher each year.

Meanwhile, AbbVie has been working hard to diversify its revenue stream. Last year the company acquired Pharmacyclics in order to get a share of Imbruvica, the breakthrough Leukemia drug partially developed by Johnson & Johnson. AbbVie's heavy investment in R&D has led to a good handful of de-risked drugs that could bring in up to $30 billion in revenue. This article looks at AbbVie's latest quarter and full-year results, and looks at what this could mean for dividend growth in 2016.

Impressive growth, high leverage

AbbVie's business model looks something like this: The company takes out lots of debt, plows it into research (and sometimes acquisitions), and then hopefully churns out some useful patented pharmaceuticals. Abbvie is, therefore, a highly-levered company. Its debt is around 6.5 times EBITDA. More on that a little later.

Last quarter AbbVie continued its long-term, double-digit growth trajectory. Net revenue grew 24.4% year-on-year, with Humira revenue growing another 16%, operationally. Full-year revenue grew 22%, and full-year EPS increased a terrific 29% over the same period. Currency fluctuations took 6 percentage points out of revenue, but even still, growth was very impressive.

Management once again confirmed its long-term plan of double-digit earnings and revenue growth up until 2020. In particular, management sees a lot of potential in Imbruvica, as well as a large handful of drugs in the late-stages of FDA approval. AbbVie has a big, transformational pipeline.

Even better, it seems fears of imminent bio-similar competition to Humira by 2017 were overblown. It now looks like that competition won't be coming until 2020, and so AbbVie will have four more years of solid growth and high margins from Humira.

Since AbbVie's spinoff in 2013, the company has turned revenue and EPS growth into dividend growth. There's no reason to doubt that trend will continue. After all, the dividend is only about 70% of free cash flow, and once a drug gets approved, the business becomes very capital-light. Last year, operating cash flow was around $5 billion and yet capex was only $540 million. That's a lot of free cash flow. In January AbbVie raised its dividend 11.7% higher than the quarterly dividend from last year. With the way things are going, I think AbbVie can at least maintain that pace of dividend growth until 2020. Right now AbbVie yields 4.2%.

But what about debt maturities? From the latest quarterly filing on September 30, AbbVie has $3 billion coming due in 2018, $3.75 billion in 2020, $1 billion in 2022, and the rest is staggered between 2025 and 2045. Management's strategy appears to be to 'grow out of the problem.' At this rate, by 2018, operational cash flow should be about 50% greater than it is today, and that would give the company significant financial flexibility by which to deal with debt. I'm confident that AbbVie can achieve that goal.

Valuation and conclusion

Despite top-tier growth from the company, AbbVie is actually pretty cheap. It trades at just 12.8 times 2015 earnings and yields a nice 4.2%. While historical valuation data is quite limited on this young company, I'm willing to go out on a limb, regardless.

This last year was a very good one for AbbVie. AbbVie executed very well, moving a good handful of new drugs toward final approval and growing Humira revenue substantially. While debt is quite high, management is thusfar doing well to grow out of this debt challenge. I believe that, over time, the upside on AbbVie will be quite substantial if it makes good on its promises for growth.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.