Introduction
I just read an interesting Wall Street Journal article that discussed the accelerating trend of shoppers buying store brands to deal with rising inflation.
As we can see below, demand for store brands has exploded, including products in categories where companies tend to have low customer loyalty, like dish care, air fresheners, pasta, candy, and others.
Looking at the chart below, we see that roughly $0.20 of every dollar spent in grocery stores goes towards private-label products - that's the highest number "ever."
Also note the acceleration after the pandemic, when inflation became an issue.
The reason I'm bringing this up is to show the lasting impact of what is still very "sticky" inflation.
I'm also bringing it up because I recently wrote an article titled "High Yields And Low Multiples - 3 Of My Favorite Dividend Stocks To Buy Right Now."
In that article, I explained my intention to own stocks with attractive valuation, inflation protection, and wide moats to prepare for what could be an unfavorable market environment, as explained by JPMorgan (JPM) CEO Jamie Dimon:
“Stocks are very high, and I think the chance of inflation staying high or rates going up are higher than people think,” the CEO said. “My view is whatever the world is pricing in for a soft landing, I think it’s probably half of that. I think the chances of something going wrong are higher than people think.” - Jamie Dimon via Bloomberg
One of the stocks I highlighted in that article was AbbVie (NYSE:ABBV), the first healthcare stock I bought for my dividend growth portfolio.
As my most recent in-depth article on AbbVie was written on February 5, it's time for another focused article to explain why I consider AbbVie to be one of the best growth/income hybrids on the market.
So, let's get to it!
The Perfect Mix Of Growth And Value
Ignoring special dividends, AbbVie is the fifth-highest-yielding stock in my dividend growth portfolio.
The company currently pays $1.55 per share per quarter, which translates to a yield of 4.0%.
This dividend comes with a highly favorable Seeking Alpha dividend scorecard, supported by a 55% payout ratio and a five-year CAGR of 8.3%.
Moreover, the company has hiked its dividend every single year since it was spun off by healthcare giant Abbott Laboratories (ABT) in 2012.
Also, for what it's worth, technically speaking, AbbVie is a Dividend King with 50 or more consecutive annual dividend hikes, as Abbott has that status.
Both Abbott and AbbVie have hiked their dividends every single year since they split.
On top of that, the company has a highly favorable total return profile, as the pharma giant with a market cap of $275 billion has returned 334% over the past ten years, beating the 232% return of the S&P 500 by a wide margin.
This outperformance includes periods of elevated uncertainty, such as the patent loss of its flagship drug, Humira.
I added emphasis to the quote below to highlight how big of a deal this was (and still is):
Humira, which enjoyed market exclusivity for 20 years until its patent expired at the beginning of 2023, raked in $21.2 billion for drugmaker AbbVie in 2022 and roughly $200 billion since it first came to market. - Healthcare Brew
The good news is that AbbVie continues to prove its ability to innovate, strengthen its portfolio, and pave the way for what I expect to be many years of elevated shareholder returns and capital gains.
AbbVie's Future Is Bright
During the Bank of America Health Care Conference earlier this month, the company highlighted its strongest benefit: a fantastic product portfolio.
The company's growth platform accounts for roughly 80% of its business, with growth in the mid-teens.
Moreover, despite challenges like the aforementioned Humira erosion, the company's growth platform is performing well, with $5.6 billion in growth this year alone and mid-teens growth from the ex-HUMIRA platform in the first quarter.
In the first quarter, total revenue came in at $12.3 billion, $400 million higher than the company had expected.
The ex-Humira platform saw more than 15% growth.
First quarter results were well ahead of our expectations, driven by excellent performance from our ex-Humira growth platform. Based on our strong results and significant momentum, we are raising our full-year outlook. ABBV 1Q24 Earnings Release
New guidance sees adjusted EPS between $11.13 and $1.33, with net sales of at least $55 billion - $800 million more than previously expected.
Two standout drugs I also mentioned in my "High Yields And Low Multiples" are Skyrizi and Rinvoq.
These two drugs have combined growth of more than 50% in their fifth year on the market.
To add some color, Skyrizi, with global sales of $2 billion and operational growth of 48%, has massively improved its position as a market leader in biologic psoriasis treatment.
Biologics are different from systemic drugs as they do not target the entire immune system.
Similarly, Rinvoq achieved global sales of $1.1 billion, which translates to a 61.9% increase.
These two drugs are expected to exceed $27 billion in combined sales by 2027, which would be up from $16 billion in 2024E - a 19% CAGR!
Even better, the company has a promising pipeline, including oncology programs, such as 383, a BCMA CD3 bispecific in myeloma, and 400, which is an ADC using the Topo-1 warhead.
If you're wondering what ADCs are, you're probably not alone.
ADCs are an emerging class of pharmacological compounds that combine the potency of anti-cancer drugs (often called payloads) with the specificity of mAbs to the tumor site, thus combining chemotherapy and immunotherapy. - National Institute of Health
Also, please note that a Topo-1 warhead is not a weapon designed by one of America's defense contractors but a Topoisomerase I Inhibitor, which is critical in delivering the drugs to tumors.
Speaking of oncology, the company's ImmunoGen takeover adds tremendous value to its oncology platform.
The addition of ImmunoGen's treatment for ovarian cancer will accelerate our ability to help patients today, expand our oncology pipeline and drive long-term revenue growth well into the next decade. - ABBV
Adding to that, the expected approval of new indications, like UC for SKYRIZI (see the overview below) and additional indications for RINVOQ, covering conditions like vitiligo, HS, alopecia, lupus, and GCA, is expected to drive growth.
According to the company, the indications for RINVOQ alone will add "a few billion dollars in peak revenue."
Please note that these expectations are included in the 2027 guidance chart I showed in this article.
On top of innovating, the company's commercial strategy focuses on improving its core market presence and expanding into neuroscience and oncology.
In order to successfully grow here, the company is improving marketing efforts and strategic partnerships to gain market share more rapidly.
As a result, the company expects annual high-single-digit revenue growth through the end of the decade, which bodes extremely well for its valuation, dividend growth, and overall total return picture.
Valuation
AbbVie, which has an A- credit rating, is trading at a blended P/E ratio of 13.9x, which is slightly above its 10-year normalized P/E ratio of 13.2x.
Looking at the FactSet numbers in the chart above, analysts expect accelerating EPS growth, from a 19% decline in 2023 (due to Humira) to 1% growth in 2024 and 12% growth in 2026.
Combining this with its 4% dividend and 13.2x multiple, we get an outlook of 8-10% annual returns, which I expect to come in at the higher end of that range if the company manages to maintain double-digit annual EPS growth beyond 2026.
As a result, I am consistently buying more ABBV stock on corrections, making it a cornerstone of my dividend growth portfolio.
Takeaway
In light of a challenging macroeconomic environment, one standout in my portfolio is AbbVie, which offers a perfect mix between income and growth.
Despite the patent loss of Humira, AbbVie’s innovation and strong product portfolio, including drugs like Skyrizi and Rinvoq, drive its impressive performance.
Moreover, with a promising pipeline and strategic expansion into oncology, AbbVie is poised for sustained growth, which could see sustained low-double-digit annual EPS growth.
Hence, trading at a reasonable valuation with a 4% dividend yield, AbbVie remains a cornerstone of my dividend growth strategy.
Pros & Cons
Pros:
- Juicy Dividend: AbbVie offers an attractive, well-covered, 4% dividend yield with consistent hikes.
- Growth Potential: With promising drugs like Skyrizi and Rinvoq, AbbVie is in a great spot to generate substantial growth.
- Innovation: AbbVie's ability to innovate and expand into areas like oncology comes with long-term growth opportunities.
- Valuation: Trading at a reasonable P/E ratio, AbbVie stands out in a market with an overall lofty valuation.
Cons:
- Humira's Patent Loss: The recent expiration of Humira’s patent shows the vulnerabilities of biotech giants.
- Innovation Dependence: AbbVie's growth heavily relies on the success of new drugs and M&A.
- Competition: The pharmaceutical sector is highly competitive.
- Regulatory Risks: Changes in healthcare regulations and drug approval processes can negatively impact AbbVie’s operations and profitability.
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