AbbVie: The Right Mixture for the Perfect Stock

While the idea of investing in stocks can seem complex, it is actually quite simple. Stock returns are based on either a rising share price, or dividends received. Fundamentally, an increasing stock price is the result of earnings-per-share -- or EPS -- growth or an expansion in the price-to-earnings multiple, or both. There are three pillars of shareholder return -- EPS growth, multiple expansion and dividends. Finding a stock that is likely to positively contribute one of the three pillars is challenging. Even more difficult is finding a stock that can offer all three. In these rare cases, we often give our strongest buy recommendations. AbbVie Inc. is one of the unique stocks in our research database that we believe will exhibit positive EPS growth, multiple expansion, and has a high dividend yield. This is why AbbVie remains one of our strongest buy recommendations. Strong Quarter, Growing Strength AbbVie is a pharmaceutical company focused on immunology, oncology, and virology. AbbVie was spun off by Abbott Laboratories in 2013. It now trades with a market capitalization of $96 billion. Its most important product is Humira, which by itself represents approximately 60% of annual revenue. AbbVie recently reported strong results for the 2019 second quarter. Revenue of $8.3 billion beat analysts' expectations by $170 million. Adjusted earnings-per-share of $2.26 also beat expectations, by 5 cents per share. Net revenue declined 0.3% year-over-year, but on an adjusted basis revenue increased 1.5% operationally for the quarter. Global Humira revenue declined 5% operationally for the quarter. In the U.S., Humira revenue increased 8%, but international Humira revenue declined by 31% last quarter. AbbVie's major risk is loss of exclusivity for Humira, which has already transpired in Europe and will occur in the U.S. in 2023. Fortunately, AbbVie has multiple organic growth opportunities to replace any declines in Humira sales after 2023. These new products are already showing strong results. For example, last quarter AbbVie's global net revenue from its hematologic oncology portfolio were $1.268 billion, an increase of 39%. The crown jewel of this portfolio is Imbruvica, which reported global revenue of just over $1 billion last quarter, a nearly 30% growth rate. In addition, global Venclexta revenue hit $169 million for the quarter. AbbVie's robust hematologic portfolio will fuel its organic pipeline for years to come. AbbVie expects non-Humira product sales to exceed $16 billion by 2020, and $35 billion by 2025. And yet, investors continue to be unimpressed with AbbVie's reported results. Shares of AbbVie have declined 30% year-to-date, a significant decline that implies a deteriorating business model. But AbbVie continue to grow EPS. After providing second-quarter results, AbbVie raised its full-year guidance. The company now expects adjusted EPS in a range of $8.82 to $8.92, up from previous expectations of $8.73 to $8.83. At the midpoint of revised guidance, AbbVie expects 12% adjusted EPS growth for 2019. Acquisition Injection In addition to organic growth, AbbVie has the financial resources to invest in acquiring growth, and recently did so in a huge way. AbbVie is also investing aggressively in acquisitions, specifically the recent $63 billion takeover attempt of Botox-maker Allergan . The acquisition diversifies AbbVie's product offerings by adding exposure to new segments, while enhancing its position in existing categories. The combined company will have annual revenues of nearly $50 billion, based on 2018 results. AbbVie expects the transaction to be 10% accretive to adjusted earnings-per-share over the first full year following the close of the transaction, with peak accretion of greater than 20%. AbbVie will be more leveraged following the transaction, as a portion of the cash component of the offer will be funded with new debt. AbbVie had $36.6 billion of total debt at the time of its most recent quarterly earnings release. Fortunately, the company is committed to a Baa2/BBB or better credit rating. AbbVie also issued a new debt reduction target of $15 billion to $18 billion by 2021. Easy-to-Swallow Prices AbbVie has a strong business model with an attractive pipeline and multiple catalysts for future growth. In addition, the stock is far too cheap, trading with a 2019 price-to-earnings ratio of just 7.3 times. We believe a proper fair value estimate for AbbVie is a price-to-earnings of around 13.0 times, which is still a fairly modest valuation for a growth company with a safe dividend. Even so, if the price-to-earnings ratio expands from 7.3 times to 13.0 times, it would generate a nearly doubling of AbbVie's share price. Earnings-per-share growth and dividends will add further to AbbVie's shareholder returns. In regards to its dividend, AbbVie is a very attractive stock for income investors. AbbVie has a yield of 6.7%. AbbVie's high yield is even more enticing given the recent action by the Federal Reserve to lower its Fed Funds rate for the first time since 2008. If another period of falling interest rates is upon us, investors will once again be hard-pressed to find high levels of income from bonds. AbbVie operates with strong safety metrics. It has an expected dividend payout ratio of 49% for 2019, which indicates a secure dividend. With a modest payout ratio slightly below 50%, AbbVie's dividend is safe even with a significant decline in EPS. But that does not seem likely, as AbbVie has reported strong EPS growth as an independent company. It also has an impressive organic pipeline and a massive acquisition on the horizon, a long history of dividend growth and a positive growth outlook up ahead. As a result, AbbVie should be able to continue increasing its dividend each year. In total, the combination of positive EPS growth, an expanding price-to-earnings multiple, and dividends could result in annual shareholder returns well above 20%. This makes AbbVie a highly appealing stock for value and income investors alike. ABT is a holding in Jim Cramer's Action Alerts PLUS member club.

AbbVie: The Right Mixture for the Perfect Stock

ABBV has a positive earnings-per-share growth, an expanding price-to-earnings multiple and dividends that could result in annual shareholder returns well above 20%.

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