AbbVie Inc. (ABBV) has one of the highest dividend yields among the Dividend Aristocrats Index. Since AbbVie's spinoff from Abbott Laboratories in 2013, the company's stock has been used by many dividend growth investors to increase the yields of their investment portfolios.
Unfortunately, AbbVie's high dividend yield combined with the patent expirations facing its main drug Humira have led some investors to question the safety of its current dividend payment.
In this article, we perform a deep dive into AbbVie's dividend safety. If you prefer learning through videos, you can watch a video analysis on the topic below:
AbbVie Business Overview
To begin, let’s talk about AbbVie’s business model. AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology, and virology. AbbVie was spun-off from Abbott Laboratories in 2013. Today, AbbVie generates annual sales of approximately $30 billion and trades with a market capitalization of $140 billion.
AbbVie is a well-known dividend stock because of its compelling track record of dividend growth. If you include the company’s history as a wholly-owned subsidiary of Abbott Laboratories, then AbbVie has increased its dividend for a remarkable 45 consecutive years. This qualifies AbbVie to be a member of the Dividend Aristocrats, a group of elite dividend stocks with 25+ years of consecutive dividend increases.
Looking ahead, the patent expirations of AbbVie’s main drug Humira combined with its high dividend yield has led some investors to question the safety of its future dividend payments. For the remainder of this article, we will discuss the company’s current dividend safety from four perspectives:
- it’s dividend safety in the context of its current earnings
- its dividend safety in the context of its current free cash flow
- its dividend safety in the context of its recession performance
- its dividend safety in the context of its current debt load.
AbbVie’s Dividend Safety Relative to Earnings
First, let’s discuss AbbVie’s dividend safety in the context of the company’s current earnings.
When AbbVie reported third quarter financial results on November 2nd, the company updated its financial guidance for the full fiscal year. AbbVie now expects to generate earnings-per-share between $7.90 and $7.92 for fiscal 2018.
For context, AbbVie currently pays a quarterly dividend of $1.07, which implies a payout ratio of 54%.
Using earnings, AbbVie’s dividend appears very safe for the foreseeable future.
AbbVie’s Dividend Safety Relative to Free Cash Flow
Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare AbbVie’s current dividend payment to its free cash flow.
Through the first nine months of fiscal 2018, AbbVie generated $10.0 billion of cash from operating activities and spent $515 million on capital expenditures for free cash flow of approximately $9.5 billion. The company spent $4.1 billion on common share dividends during the same time period for a free cash flow dividend payout ratio of approximately 43%.
Using free cash flow, our conclusion is the same as when we used earnings to measure AbbVie’s dividend safety. The company’s dividend appears safe for the foreseeable future.
AbbVie’s Dividend Safety Relative to Recession Performance
Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze AbbVie’s current dividend safety in the context of the company’s historical recession performance.
We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. While AbbVie was not publicly-traded during the last recession, its parent company Abbott Laboratories was. Abbott’s performance during this time period is shown below:
- 2007 adjusted earnings-per-share: $2.84
- 2008 adjusted earnings-per-share: $3.03
- 2009 adjusted earnings-per-share: $3.72
- 2010 adjusted earnings-per-share: $4.17
- 2011 adjusted earnings-per-share: $4.66
Abbott Laboratories’ earnings-per-share increased each year of the last major recession. AbbVie should be similarly recession-resistant. Accordingly, we have no concerns about the company’s ability to pay rising dividends moving forward.
AbbVie’s Dividend Safety Relative to Its Current Debt Load
The last angle that we will use to assess AbbVie’s current dividend safety is by looking at the company’s current debt level. More specifically, we will see how much the company’s weighted average interest rate will need to increase before the company’s free cash flow will no longer cover its dividend payment.
Through the first nine months of fiscal 2018, AbbVie generated $968 million of gross interest expense and ended the period with total debt of $36.5 billion for a weighted average interest rate of 2.6%.
The following image show how changes to AbbVie’s weighted average interest rate would impact its dividend safety, as measured by free cash flow:
As the image shows, AbbVie’s weighted average interest rate would need to rise to approximately the 20% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that AbbVie’s debt level is unlikely to impact the safety of its dividend moving forward.
AbbVie's high yield combined with the patent expirations facing its main drug Humira have led some investors to question the safety of its current dividend payment.
In this article, we examined the company's dividend safety relative to its earnings, free cash flow, recession performance, and debt levels. We concluded that AbbVie's dividend is currently covered by fundamentals, and we have no concerns about its ability to fund its dividend for the foreseeable future.
Disclosure: I am/we are long ABBV. 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.