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AbbVie: Great Company, Future Upside Likely Weakened
Stock Analysis & Ideas

AbbVie: Great Company, Future Upside Likely Weakened

AbbVie (ABBV) is a diversified research-based biopharmaceutical company operating globally. AbbVie’s comprehensive product portfolio of therapies aims to cure some of the most complex and severe diseases in the world.

Following AbbVie’s acquisition of Allergan in 2020, the company further enriched its biopharmaceutical portfolio, solidifying its leading position in critical therapeutic areas such as aesthetics, neuroscience, eye care, women’s health, immunology, and hematologic oncology.

I am particularly keen on AbbVie’s persistent efforts to maximize profitability backed by its high-margin business model. The company should keep driving steady margin expansion over time through the continued realization of cost synergies from the Allergan acquisition, economies of scale from revenue growth, production initiatives in the supply chain, and lasting efficiency schedules to optimize manufacturing.

In my view, AbbVie checks all the boxes when it comes to growth, moat and competitive advantages, profitability prospects, and growing capital returns.

Despite the company retaining all of its underlying qualities, with the stock rallying by close to 30% year-to-date, I believe that much of AbbVie’s “easy” upside has already been realized.

Accordingly, I am neutral.

Latest Results: Strong Bottom Line Profits

AbbVie’s latest results illustrated the company’s ability to generate robust cash flows and a rich bottom line once again.

Revenues came in at $14.9 billion during the quarter, a 7.4% increase year-over-year. Revenue growth was powered by increased sales in several of its drugs, including Humira, Skyrizi, and Rinvoq. Specifically, each of these three drugs saw its sales increase by 3.5%, 70.5%, and 84.4%, respectively.

Driven by AbbVie’s profit-maximization catalysts mentioned earlier, adjusted earnings per share came in at $3.31, 13.3% higher compared to the prior-year period.

With AbbVie’s biopharmaceutical sales retaining a strong growth trajectory, management’s Fiscal 2022 outlook included adjusted diluted EPS estimates in the range of $14 to $14.20, implying growth of 11% at the midpoint compared to Fiscal 2021.

The fact that AbbVie continues to target double-digit EPS growth despite how mature its portfolio has already evolved is nothing short of impressive.

Dividend Growth Prospects

Fused with its dividend growth track record prior to its spin-off from Abbot Laboratories, AbbVie has “unofficially” hiked its dividend annually for 50 successive years.

Despite such an extended track record which would otherwise suggest Abbvie is a very mature business, the company’s five-year dividend per share CAGR currently stands at a remarkable 17.9%.

The latest DPS hike back in October was by a slightly softer 8.5% to a quarterly rate of $1.41, implying a modest slowdown in dividend growth.

However, considering the strong Fiscal 2022 outlook, I wouldn’t be surprised to see the DPS growth pace returning to double-digits. After all, the current DPS run rate and AbbVie’s adjusted EPS outlook indicate a healthy payout ratio of 40%.

Note that while some investors have been wary about Humira’s sales decompressing in the mid-2020s following AbbVie’s patent expiry, management has reassured investors by forecasting that company-wide revenues in 2025 will be higher than last year’s.

This illustrates how robust and diversified AbbVie’s portfolio is, with Allergan’s acquisition once again proven very beneficial and timely. Hence, the case for double-digit DPS growth over the medium-term remains quite conceivable, in my view.

Valuation

Following the stock’s strong rally year-to-date, AbbVie’s short-to-medium-term upside could be limited.

Back in December, AbbVie was trading at a forward P/E close to 9.2. Today, this multiple has expanded to 12.2, despite AbbVie’s strong Fiscal 2022 guidance.

Indeed, this multiple still appears rather attractive, and I wouldn’t be surprised if a further valuation expansion were to occur. However, with the “easy” money on AbbVie having already been made, I would feel more comfortable booking some profits at this stage.

As a result of the recent valuation expansion, AbbVie’s yield has declined from just under 5% near December to around 3.1% currently, despite another robust DPS hike during the period.

Again, it’s not a bad yield to grab, considering AbbVie’s dividend growth prospects. However, the overall margin of safety and predictability of future total returns previously offered by the dividend has certainly softened.

Wall Street’s Take

Turning to Wall Street, AbbVie has a Moderate Buy consensus rating based on 11 Buys and five Holds assigned in the past three months. At $155.47, the average AbbVie price target implies 9.3% downside potential.

Takeaway

AbbVie is one of the most reliable and investor-friendly companies in the healthcare sector. Its capital-return track record, including 50 years of consecutive annual dividend hikes whose growth rate continues to be quite strong, is rather remarkable.

AbbVie should continue to see its bottom line expanding rapidly over the medium term, driven by a robust sales growth outlook through 2025 and the company’s profit maximization initiatives and catalysts. Its dividend growth prospects remain vigorous.

However, following the stock’s valuation expansion over the past several months, current investors are buying into a feebler dividend yield and a less appealing upside potential, in my view.

Thus, while AbbVie could be quite investable still, its investment case has certainly been diluted to some extent.

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