Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
AbbVie’s Dividend Growth score of 89 is excellent. The company last increased its dividend by 12% in October 2015 and is included on the dividend aristocrats list despite being spun off at the start of 2013, when it continued its dividend growth streak as an independent business.
Abbott Laboratories, which spun off AbbVie, has a dividend growth streak of more than 40 consecutive years and is the reason why AbbVie is considered a dividend aristocrat. With that said, AbbVie has increased its dividend by 42% since 2013 with increases each year.
We believe AbbVie will continue recording at least a high-single dividend growth rate for the next few years. Growth will be fueled by the company’s reasonable free cash flow payout ratio of 49% and strong business fundamentals as drug sales and margins are expected to increase significantly through 2020.
The main wild card impacting future dividend growth beyond the next few years is the rise of Humira competition, which could come as early as 2019 or as late as 2022. We will re-evaluate AbbVie’s dividend growth potential as that time draws nearer.
Valuation
AbbVie Inc (NYSE:ABBV)’s stock trades at 11.1x forward earnings estimates and has a dividend yield of 4.1%. For a stock with above-average growth prospects over the next few years, it appears to be very reasonably priced.
The seemingly low expectations attached to the stock are a reflection of investors’ concerns about AbbVie’s concentration in its Humira drug, which is set to experience competition in the U.S. market sometime over the next three to six years. With its European patent set to expire in 2018 as well, growth in international markets could also slow.
However, Evercore ISI’s analyst Mark Schoenebaum estimated that AbbVie’s 2020 guidance for sales and margins implies adjusted earnings per share of approximately $8.80. He applied a 16x P/E ratio to his estimate of 2020 earnings and discounted it back to 2015 using a 9% discount rate. The stock price resulting from his analysis was about $100 per share, which is nearly 100% higher than AbbVie’s most recent closing price.
With expectations for double-digit earnings growth through 2020, AbbVie’s total return potential certainly looks attractive at first glance. However, dividend investors must be willing to accept the higher uncertainty surrounding the company’s cash flows beyond 2020.
Conclusion
While the market’s expectations seem to bake in a good amount of caution today, it’s still hard to get comfortable with AbbVie’s competitive landscape over the next five years. The key issue is how long the company’s Humira drug can profit in the U.S. before biosimilar competition emerges. The difference of just a few years could really make or break the stock’s performance over the coming years.
Unfortunately, we don’t have an edge when it comes to analyzing this risk, nor do we have a comfortable method of evaluating AbbVie’s large pipeline of new drugs that will launch over the next five years. The stock looks set to be a big winner if it delivers on management’s 2020 goals (it trades for less than 7x implied 2020 earnings per share today), but we would ultimately prefer to stick with other blue chip dividend stocks that offer greater profit diversification and a slower pace of industry change.
Disclosure: None
