AbbVie could be the ultimate dividend stock to own, as it has increased its dividend by more than 285% since its inception in 2013. It means that AbbVie has increased its dividend at a higher rate than the sector median over the past ten years. But I believe there are more reasons to invest in AbbVie, which I will cover in this analysis. I will also share my calculations to determine at what price I would buy AbbVie shares.
This is not a financial advice. I am not a financial advisor and I only do these posts to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
If you regularly read my posts on eToro, you would know that I often write about AbbVie, and that it is one of the larger positions in my portfolio. If you want to copy my portfolio or accessing information about the stocks I own, you can find detailed instructions on how to do so here. My view on AbbVie hasn't changed, despite Warren Buffett closing his position in Q1 2022. For full disclosure, I need to let you know that I purchased my initial position in AbbVie in April 2020, and it is a company that I really like. However, as always, I will not be biased in this analysis. One thing I should mention to begin with is that AbbVie acquired Allergan in 2020, which means that the numbers from 2020 and beyond will be somewhat distorted. If you want to purchase shares or fractional shares of AbbVie, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
AbbVie is a pharmaceutical company that was founded in 2013 as a spin-off of Abbott Laboratories. It is one of the largest pharmaceutical companies in the world, ranked 5th largest, and is located in Illinois, USA. AbbVie Inc. discovers, develops, manufactures, and sells pharmaceuticals worldwide. AbbVie has a comprehensive product portfolio with leadership positions across various sectors: immunology (48% of revenue in 2023), neuroscience (14% of revenue in 2023), oncology (11% of revenue in 2023), aesthetics (10% of revenue in 2023), and eye care (4% of revenue in 2023). The remaining 13% of the revenue comes from other sources. AbbVie generates approximately 83% of its revenue from the United States, and the remaining 17% internationally. Some of AbbVie's most well-known therapies include Humira, an injection for autoimmune diseases such as intestinal Behçet's disease and pyoderma gangrenosum; Skyrizi, used to treat moderate to severe plaque psoriasis, psoriatic disease, and Crohn's disease; Rinvoq, which is prescribed for rheumatoid and psoriatic arthritis, ankylosing spondylitis, atopic dermatitis, axial spondyloarthropathy, ulcerative colitis, and Crohn's disease; Imbruvica, indicated for the treatment of adult patients with blood cancers; Ubrelvy, for the acute treatment of migraines in adults; and Qulipta, for episodic and chronic migraines. Additionally, AbbVie also owns Botox in its aesthetics division. As with all other pharmaceutical companies, it is not difficult to determine a moat for AbbVie. All pharmaceutical companies, including AbbVie, have a moat due to their patents. Meaning that once you invest in pharmaceuticals, you need to stay updated on their therapies and patents.
Management
The CEO is Richard Gonzalez. He first joined Abbott Laboratories more than 30 years ago and held various positions in the company before becoming the CEO of AbbVie when it was founded in 2013. Previously, there has been some controversy surrounding Richard Gonzalez due to misleading information about his credentials. The controversy arose when Abbott Laboratories claimed that he had a bachelor's degree in biochemistry from the University of Houston and a master's degree from the University of Miami. He attended the University of Houston with a major in biochemistry but did not earn his degree. Although he did not pursue a master's degree at the University of Miami, he did work as a research biochemist. This implies that he does not possess a college degree. The controversies regarding his credentials and his battle with throat cancer led him to briefly retire in 2007 before returning to Abbott Laboratories. Regardless of his educational credentials, his extensive industry experience and impressive results demonstrate that he is a great CEO. Warren Buffett had no problem investing in AbbVie despite this. While you should conduct your own research, it is certainly reassuring to know that someone who emphasizes the significance of management has previously invested in the company.
The Numbers
The first number we will look into is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% every year. AbbVie has delivered a return on invested capital (ROIC) above the required level in most years, with the exceptions being 2020 and 2023. 2020 was affected by the pandemic, which partly explains the underwhelming numbers. Additionally, it was the year when they acquired Allergan. The number in 2023 is affected by the patent loss of Humira, which was the world's best-selling therapy. Overall, I find the numbers encouraging as AbbVie usually delivers a Return on Invested Capital (ROIC) above 10% per year, and in those years when they haven't, there is an explanation. Nonetheless, I would like to see the Return on Invested Capital (ROIC) exceed 10% in 2024 once again.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The first thing to notice is that there are some years with negative numbers. Both of them were separate entities before AbbVie acquired Allergan. Since the acquisition, AbbVie has successfully increased its equity every year until 2023, which was affected by the patent loss of Humira. Despite the underwhelming years and the potential impact of Humira's patent loss in 2024, I remain confident that AbbVie will successfully increase its equity in the long term.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that AbbVie has delivered a positive free cash flow every year in the past ten years. AbbVie had increased its free cash flow every year from 2019 until 2022, but experienced a decrease in free cash flow in 2023 due to the patent expiration of Humira. However, it is encouraging that AbbVie managed to deliver its second-highest free cash flow ever in 2023 despite the patent loss of Humira. Another encouraging thing is that AbbVie has delivered its highest levered free cash flow margin in the past three years, exceeding 40% in both 2022 and 2023. Free cash flow yield in 2023 is slightly below the ten-year average. However, a free cash flow yield of 6,9% is still high, which could indicate that AbbVie shares are not expensive. We will revisit this point later in the analysis.
Debt
Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. Upon calculating AbbVie's financials, I have determined that AbbVie has 10,8 years of earnings in debt. This is higher than I would prefer, but it is partly attributed to the acquisition of Allergan in 2020 and the acquisitions of Cerevel in 2023. AbbVie has also acquired ImmunoGen in 2024, which suggests that the debt-to-earnings ratio will likely be higher in 2024. Usually, I don't like having such high debt, but in this case, the acquisitions justify the debt. AbbVie has mentioned that they will focus on debt repayment.
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Risks
Based on my preliminary findings, I believe that AbbVie could be an intriguing investment. However, no investment is without risk, and AbbVie also has its share of risks. The most obvious risk is debt. In his book "Rule #1 Investing," Phil Town mentions the following about debt: "A business that carries a significant amount of debt compared to its income faces an uncertain financial future." "If there are any problems with the economy, a business with a significant amount of loans might be in big trouble." As an investor, I dislike unpredictability. Although I don't believe that AbbVie will go bankrupt, there is an explanation for AbbVie's high debt, but it is still something that needs to be monitored. Especially because the debt-to-earnings ratio is expected to increase in 2024 due to their acquisition of ImmoGen. Management is focused on repaying debt, but having a debt to earnings ratio of more than 10 years poses a risk.
Patent losses. Patents covering AbbVie products typically grant market exclusivity, which is crucial for the profitability of many of AbbVie's products. As patents for certain of its products expire, AbbVie could face competition from lower-priced generic or biosimilar products. The expiration or loss of patent protection for a product is usually followed promptly by substitutes that may significantly reduce sales for that product in a short period of time. AbbVie lost its patent on Humira, marking the largest loss of exclusivity event to date in the pharmaceutical industry. The loss of patent protection for Humira led to a decline in revenue for AbbVie for the first time in ten years. As evident from the previous figures, this also impacted the Return on Invested Capital (ROIC) and free cash flow. There will be more patent losses in the future, and if AbbVie does not have new therapies to fill the void, it will affect its performance.
Laws and regulations. The U.S. healthcare industry, in particular, is highly regulated and is subject to frequent and substantial regulatory changes. It is expected that the U.S. healthcare industry will continue to be subject to increasing regulation, political, and legal actions as future proposals to reform the healthcare system are considered by the executive branch, Congress, and state legislatures. According to Fitch Ratings, U.S. pharmaceutical companies are facing growing legislative and regulatory challenges that could increase their business and financial risk profiles. Fitch Ratings believes that sector margins will face pressure from lower negotiated prices, while regulatory challenges to mergers and acquisitions (M&A) will make it more difficult for companies to address patent cliffs for existing products.
Reasons to invest
In this section, I would like to discuss the potential of AbbVie. Two therapies that are expected to perform well for AbbVie in the future are Skyrizi and Rinvoq. In 2023, Skyrizi and Rinvoq generated more than $11,7 billion in total combined revenue, marking a $4 billion increase year-over-year. Management anticipates that the two therapies will collectively generate approximately $16 billion in revenue in 2024. They also expect that Skyrizi and Rinvoq will surpass $27 billion in sales by 2027, with robust growth continuing into the next decade. It is encouraging that this update reflects an increase of more than $6 billion in revenue compared to the management's prior 2027 guidance. The reason management has increased its guidance for the two therapies is that both Skyrizi and Rinvoq continue to gain market share in various areas such as psoriasis, atopic dermatitis, and rheumatoid arthritis.
Aesthetics. Management has mentioned that they expect significant growth in aesthetics this year, driven by improving market trends in the U.S. and continued execution across AbbVie's international business. They also mentioned that AbbVie is well positioned to drive strong long-term growth in this highly under-penetrated market. Furthermore, management mentioned that they anticipate Aesthetics will be a strong growth portfolio for years to come, and they remain confident in their ability to achieve more than $9 billion in sales by the end of the decade (compared to approximately $5 billion in 2023). There are various reasons why the management is optimistic. One reason is that the short-acting toxin BoNT/E has the potential to attract new patients who have not initiated toxin treatment due to concerns about appearing unnatural. Another point to consider is that a survey conducted by Needham revealed that users of GLP-1 drugs for obesity are more likely to opt for aesthetic procedures. This trend could potentially increase the demand for skin-tightening devices and wrinkle treatments.
Growing dividends. AbbVie is known for its consistent dividend growth. AbbVie has recently increased its quarterly dividend and has now raised the dividend by more than 285% since its inception in 2013. It means that AbbVie is increasing its dividend more than the sector median. AbbVie's 10-year dividend growth CAGR is 14,1% compared to the sector median of 7,3%. Therefore, AbbVie should continue to be a good stock to hold for dividend investors.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,72, which is from the year 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on AbbVie's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $23,22. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy AbbVie at a price of $11,61 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 22.839, and capital expenditures were 777. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 544 in our calculations. The tax provision was 1.377. We have 1.765,941 outstanding shares. Hence, the calculation will be as follows: (22.839 – 544 + 1.377) / 1.765,941 x 10 = $134,05 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With AbbVie's free cash flow per share at $12,50 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $143,59.
Conclusion
AbbVie is a great company with excellent management. AbbVie does have high debt, primarily due to acquisitions. This poses a risk that requires monitoring. AbbVie faces the same risks as all other companies in the sector, such as patent loss, laws and regulations. AbbVie has recently experienced the largest loss of exclusivity event to date in the pharmaceutical industry. Although the patent loss of Humira affected the numbers in 2023, 2024 will be the first full year since the patent loss of Humira. Thus, it will also affect the numbers for 2024. Laws and regulations will always pose a risk, something investors will need to accept if they choose to invest in the sector. However, it is slightly concerning that Fitch Ratings believes that U.S. pharmaceutical companies are facing growing legislative and regulatory challenges that could increase their business and financial risk profiles. Hence, monitoring this aspect is essential when investing in AbbVie. AbbVie is very optimistic about Skyrizi and Rinvoq and has recently increased guidance, which is a very positive sign. Furthermore, AbbVie is also expected to experience some tailwinds in the aesthetics business. If obesity drugs affect as many lives as expected, it will be interesting to see if they could further boost this division. AbbVie has demonstrated exceptional dividend growth, which is expected to continue. Thus, it could be a good investment for dividend investors. I already have a significant investment in AbbVie, but I might consider increasing it if the stock falls below the Ten Cap price of $134.
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