AbbVie is our top-scoring dividend stock.
Optimism is growing that it can navigate Humira's headwinds.
AbbVie checks many boxes on our Power 7 screening methodology.
It's been shown that dividend-paying stocks outperform their non-dividend-paying peers, but that doesn't mean that every dividend stock is worth owning in portfolios. A falling share price can quickly wipe away gains from dividends, making it important to focus on stocks that can benefit from both higher stock prices and future dividend increases. To help investors separate potential winners from losers, we rank hundreds of dividend stocks every week for our subscribers. This week, over 70 companies with money-making characteristics appear in our top dividend stocks list, but the highest-scoring among them is AbbVie (ABBV).
A little bit of background
AbbVie's shares have largely underperformed the S&P 500 over the past three years due to fear that expiring patents on its best-selling drug, Humira, would dent revenue and earnings and put its dividend at risk.
Used to treat a variety of autoimmune disorders, including rheumatoid arthritis, a multi-billion dollar global market indication; Humira is the world's top-selling medicine, with global sales of almost $20 billion. Since 2010, Humira's sales have more than doubled, contributing significantly to AbbVie's total revenue growth and its impressive track record of dividend increases.
Unfortunately, Humira's best days are likely behind it. On the market since 2002, Humira's patents are expiring and that's bad news for AbbVie because Humira accounts for nearly 60% of its quarterly revenue.
Overcoming a big headwind to its dividend
In 2018, Humira biosimilars became available in Europe for the first time, and as a result, Humira's international revenue fell 32%. That's not encouraging, but there's reason for optimism. Management's been planning for Humira's patent expiration for years, and so far, it's executing well on its strategy to delay biosimilars entry in the U.S. and launch new drugs.
Over the past two years, AbbVie successfully negotiated deals with generic drugmakers that should keep Humira biosimilars off U.S. shelves until 2023 and thanks to newer drugs in its product lineup, AbbVie's top-line still grew 3% last quarter despite Humira's competition overseas.
AbbVie's cancer drugs Imbruvica, which it acquired in 2015, and Venclexta, which won FDA approval in 2016, hauled in $1.3 billion - up 29.3% from one year ago - and $221 million in Q3, respectively. And, its recently launched Humira successors Skyrizi, a psoriasis treatment, and Rinvoq, a therapy for rheumatoid arthritis, contributed about $100 million in sales in the period; a promising start that suggests they could become top-sellers someday.
Furthermore, although Humira's sales fell globally, its sales in the U.S. grew 9.6% to $3.9 billion. As a result, Humira's worldwide revenue of $4.94 billion last quarter still gives it an annual run rate roughly in line with last year.
Overall, AbbVie's third quarter performance was good enough for management to bump up its full-year profit forecast to at least $8.90 per share from $8.82 per share previously, up 12.6% from last year, and to increase its dividend by 10.3%, giving shares a healthy forward dividend yield of 5.7%.
Why AbbVie is our top-scoring dividend stock
Our methodology is explained more here, but as a refresher, scores are based on a company's ability to consistently grow earnings and beat expectations, insider buying, institutional money flow, current valuation of future earnings relative to historical valuation, contra-trend short interest, and seasonality.
AbbVie ranks highly on most of these factors.
- AbbVie has beaten analysts' earnings estimates in three of the past four quarters and over the past 90 days, analysts' estimates for next year's earnings per share have increased to $9.68 from $9.25, reflecting nearly 10% growth in 2020.
- Money flow (share prices and volume) has shifted positively as investors gain confidence in AbbVie's Humira strategy and its proposed acquisition of Allergan (AGN), which will further diversify its revenue.
- AbbVie's forward price to earnings ratio of 9.2 is below its lowest trailing 12-month P/E ratio over the past 10 years of 9.88 too, suggesting it's arguably still a cheap stock to buy despite its recent rally higher.
- There are 8.5 days to cover held short in AbbVie, a level high enough to suggest to us that covering could help support shares if AbbVie's winning ways continue.
- And since being spun-off from Abbott, AbbVie has gained ground in five of the past six fourth quarters, returning a median 9.74%. Its only down year was last year when its 1.48% drop still significantly outperformed the S&P 500.
Source: Top Stocks For Tomorrow
Overall, since management has done a nice job of under-promising and over-delivering on profitability, earnings growth gives it the financial flexibility to boost dividends in the future, positive money flow suggests investor interest is returning, shares are relatively inexpensive, short sellers may be forced to cover positions, and shares enjoy seasonal tailwinds, buying AbbVie to take advantage of its 5.7% dividend yield could be smart.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABBV over 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.