In July, I wrote an article encouraging readers to buy AbbVie (NYSE:ABBV) stock. At the time, investors were beginning to consider the company’s acquisition of Allergan. And while it’s not without risks, I do see this acquisition as holding a strategic long-term benefit for shareholders. Many income and value investors own AbbVie for the dividend. That should continue to be a reason to own the stock long term. However, a forever stock is one that gives investors some growth to go along with a dividend. That story make take a little time to play out for AbbVie, but with the acquisition of Allergan, the company is setting itself up for solid, if not spectacular, growth even after their Humira patent expires in the United States. Let’s look at some of the reasons for my optimism about ABBV stock.
Rumors of an Abbvie dividend demise were debunked
After the company’s second-quarter earnings were announced there was some chatter about AbbVie cutting its dividend. The thinking was that they would need the cash to service the debt for its deal to purchase Allergan. At the time, I suggested that this was an unlikely scenario.
Making stock predictions is an imperfect science, but in this case, I was correct. As part of their third-quarter earnings announcement, AbbVie announced that it would be increasing its dividend by 10.3%. With this latest increase, the company’s cumulative dividend hikes since 2013 have reached 195%.
I had a few reasons for my optimism that still hold. First, AbbVie is a dividend aristocrat, meaning they have increased their dividend for over 25 years. Second, the company still has a patent on Humira through 2023. That is not a long time in the world of biotech. However, the drug currently accounts for approximately $16 billion in annual revenues and should continue to be a revenue generator for the next few years. Finally, AbbVie has a healthy operating cash flow that gives them plenty of room to continue increasing their dividends.
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The dividend increase was only part of the good news
By any measure, AbbVie had a solid earnings report. Analysts’ expectations were for revenue of $8.38 billion and earnings per share (EPS) of $2.30. The actual results showed significant beats on both the top and bottom lines. Revenue came in at $8.48 billion and the company announced an adjusted EPS of $2.33.
Beyond that, the company also increased its full-year guidance for 2019. AbbVie narrowed its EPS guidance to a range of between $8.90 and $8.92. The consensus analysts’ estimate of $8.90 is below the midpoint of this revised range.
Will the growth last?
The key question on investors' minds is what the company will do to take the place of the lost revenue when their patent on Humira expires. That will be an open issue for a little while and, to be fair; the company is seeing their sales of Humira decline in Europe where they are now facing biosimilar competition. This is pushing the overall sales for Humira down to $4.9 billion which is 3.7% on a year-over-year basis. And, without strong U.S. sales of Humira, AbbVie’s overall revenue would have shrunk. Fortunately, that’s not the case. The company is still seeing strong sales growth in the United States. Humira sales jumped 9.6% YoY in the third quarter.
The proof for AbbVie will be in the pipeline
Understandably, investors are concerned about AbbVie’s future post-Humira. In January, AbbVie President Mike Severino stated that the company is projecting at least $35 billion in annual risk-adjusted sales from their pipeline of drugs, minus Humira. While the company has had at least one notable success, Mavyret (Hepatitis C), it has just as many in the pipeline that will require a significant amount of growth in order to meet that lofty projection.
However, that’s where Allergan comes in.
The watchword for AbbVie is diversification. The acquisition of Allergan gives the company a chance to expand its pipeline into high growth markets where Allergan has a leadership position. In the area of medical aesthetics, Allergan is known for Botox Cosmetic, Juvederm, Coolsculpting, and Alloderm. In the neuroscience space, the company has Vraylar, Duopa, and Botox.
The deal also strengthens AbbVie’s position in women’s health and gastrointestinal franchises. AbbVie will be able to use its commercial strength to build upon Allergan’s portfolio. The point of which is that the combined company has a high potential to help AbbVie make up for the lost revenues for Humira once they occur in 2023.
In addition to reducing AbbVie’s risk from the lost Humira revenue, the acquisition of Allergan increases AbbVie’s growth platform from $14 billion to over $29 billion. The company is forecasting that this increase will provide high-single-digit revenue growth through 2023 and beyond.
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