- Abbvie looks like a great opportunity for dividend investors today, offering a 4.5% yield with 49 consecutive years of dividend growth.
- No company is immune to hardships. Abbvie is working to grow sales in its rheumatoid arthritis drug, Rinvoq, to negate the sales decline Humira will see in 2023.
- Abbvie's had an impressive price run so far - and the stock still has more room to grow.
Abbvie (NYSE:ABBV) is undervalued and looks to be a great pick for dividend investors. The company is on track to become a Dividend King in the near future, with the company's 49-year track record of consecutive dividend growth.
Even after the impressive price run-up from $75 in March 2020, and $85 in October 2020 to $115/share where the stock's trading now, I estimate that shares still have about 40% upside.
Why Shares are Undervalued
One of the major reasons Abbvie is undervalued today is that biosimilars will be allowed to compete with Humira in 2023. This will have a significant impact on the company's annual revenue since Humira is Abbvie's number 1 drug.
However, in their Q2 2021 earnings call, management restated their goal of achieving $8B in sales for their new drug, Rinvoq, by 2025. In the past 6 months, Skyrizi and Rinvoq combined for nearly $2B in sales, showing that Rinvoq still has a lot of room to grow:
Source: Q2 Earnings Release
That means that Rinvoq still has a lot of room to grow. Additionally, management also acquired Allergan, which provides the company with new growth opportunities in therapeutic fields.
Biosimilars entering Humira's market in 2023 will hurt the company, but it's not something the company's not prepared for.
The bottom line is that dividend investors with a long-term time horizon know that every company has its ups and downs. Every company has its hardships.
Abbvie has nearly become a Dividend King, and today, it's trading at a good price compared to the future cash flows the business is expected to generate. That makes the stock look like a great opportunity today.
The chase is among the best of all national pastimes; it cultivates that vigorous manliness for the lack of which in a nation, as in an individual, the possession of no other qualities can possibly atone.
- Theodore Roosevelt
Teddy Roosevelt described hunting in this quote, a sport he was very passionate about. I'd say this quote would also apply when investors go hunting for value stocks.
Searching for value stocks brings out the manliness, the muscles, and the human ingenuity buried within us all. And as a bonus, it can make us very wealthy.
I used a Discounted Cash Flow model to find Abbvie's fair value. My model projects how much unlevered free cash flows Abbvie will produce, to find the fair value price.
This model looks to take everything into the equation - sales growth, margins, debt and cash on the balance sheet, etc. - to find what the stock's worth.
It's the level of due diligence you'd do if you're looking to buy a private business at a good price.
My Discounted Cash Flow model projects that Abbvie will generate about $26-$27B in annual unlevered free cash flows going forward:
- 7% discount rate - which provides an extra margin of safety since the stock's WACC is only about 6.3%.
- 0% terminal growth rate - terminal growth is revenue growth after year 5.
- 42% operating margins - this is in line with past operating margins after non-GAAP adjustments are added back.
Today, Abbvie's fair value looks to be about $163 per share, which means the stock has about 40% upside today:
This model projects that you could make 13% annual returns from owning this stock if the stock takes 5 years to realize fair value. That means you could make even higher double-digit returns if the stock reaches its fair value sooner.
This model suggests 2 Buy Prices where you could make even higher returns:
- $105/share - 15% annual returns
- $75/share - 22% annual returns
Of course, if you're looking to buy a high-quality company like Abbvie as a long-term holding - it's ok to pay up for quality. You will probably make lower returns, but you'll still be invested in a great company you can trust.
Of course, valuations are subjective. A DCF valuation is largely subject to the Weighted Average Cost of Capital value and the Terminal Growth Rate value. These two little variables can have a huge impact on the stock's final fair value.
This sensitivity analysis shows you a range of fair values for the stock. It might be more accurate to give Abbvie an 8% discount rate, or to bump the terminal growth rate to 1%, which would give a little bit of a different fair value:
But either way - you want to buy stocks well below their intrinsic value to make high returns. When you're looking to buy stocks with a big margin of safety, you'll have better odds of making high returns.
It's not hard to see how Abbvie is undervalued today when we look at the company's historic multiples. Historic multiples suggest that the stock has a 60-80% upside to fair value, which is far above what I would estimate:
Today, Abbvie's stock still has more room to grow and seems to have about 40% upside based on free cash flow projections.
Even though Abbvie will see reduced sales after 2023 as biosimilars enter Humira's market - it's something the company is preparing for. If you're a dividend investor with a long-term time horizon, you recognize that all companies have their ups and downs over time. Today might be a good time to buy Abbvie stock while others are uncertain about the company's future.
Thank you very much for reading, and I hope you have a great rest of your day.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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