While the elements eventually gain in the long term, it is clear that fear and euphoria are the driving force behind stock prices in today's hype on the stock markets. Although it is this level of unpredictability and volatility in markets that often frustrates investors with little patience or new investment, experienced investors know that with this volatility, buying opportunities will come. Since I last wrote about AbbVie earlier this year in January, the market has punished AbbVie for the tune of a 13% drop in stock price so far (from the $ 77.65 share price on April 19). Meanwhile, S & P 500 has risen almost 16% year to date. I believe that AbbVie's hammered share price presents a good buying opportunity for those who are looking for a postal position or even for those who want to add their position. Although there are some potential headwinds that AbbVie is facing that are discussed in the Risk section of this article, I think such fears are overwhelmed and will discuss the security and growth profile of AbbVie's huge 5.5% return, new developments since my last article and AbbVie's fair value in relation to the current share price. Justification # 1: AbbVie's Safe, Massive, and Fast Growing Dividend With AbbVie's Dividend Exchange approaching a full-time course, it is a fair question to ask whether the dividend is secure. Often, an abnormally high exchange rate shows that either 1) the dividend is likely to be cut in the near future or…
While the elements eventually gain in the long term, it is clear that fear and euphoria are the driving force behind stock prices in today’s hype on the stock markets.
Although it is this level of unpredictability and volatility in markets that often frustrates investors with little patience or new investment, experienced investors know that with this volatility, buying opportunities will come.
Since I last wrote about AbbVie earlier this year in January, the market has punished AbbVie for the tune of a 13% drop in stock price so far (from the $ 77.65 share price on April 19).
Meanwhile, S & P 500 has risen almost 16% year to date. I believe that AbbVie’s hammered share price presents a good buying opportunity for those who are looking for a postal position or even for those who want to add their position.
Although there are some potential headwinds that AbbVie is facing that are discussed in the Risk section of this article, I think such fears are overwhelmed and will discuss the security and growth profile of AbbVie’s huge 5.5% return, new developments since my last article and AbbVie’s fair value in relation to the current share price.
With AbbVie’s Dividend Exchange approaching a full-time course, it is a fair question to ask whether the dividend is secure. Often, an abnormally high exchange rate shows that either 1) the dividend is likely to be cut in the near future or which I think is the case here 2) the markets are over-reactive and while there are risks, the risks are probably more than priced at the current price.
The first metric I use to assess the security of a dividend is the EPS payout rate.
For AbbVie, the company generated adjusted diluted EPS for USD 7.91 for FY 2018 as expected in the previous article against $ 3.59 in dividends paid out during FY 2018. This is equivalent to a payout ratio of 45.4% for FY 2018. AbbVie’s dividend meets a large balance between rewarding shareholders in the present while retaining enough capital for future R&D to finance the next generation of drugs that allow strong dividends to continue in the future, not to mention repurchase of shares as SEK 5 billion to the repurchase program, which was approved in December last year (over 4% of the outstanding shares at the current price).
Considering this year, AbbVie is guiding average adjusted diluted EPS of $ 8.70 for FY 2019, which would mean a payout rate of 49.2% for this fiscal year.
Using the EPS payout rate, the payout seems to be reasonably safe.
Image Source: AbbVie 10-K Form
AbbVie generated an operating cash flow of $ 13,427 billion against $ 638 million in FY 2018 investment, free cash flow of $ 12,789 billion . Compared to the $ 5,580 billion in dividends paid during this period, this corresponds to a payout ratio of 43.6%.
Given that AbbVie had 1,479 billion shares at the end of 2018 (per page 46 in 10-K) and that we should see repurchases this year, I expect annual dividends to be paid on somewhere around 1,450 billion shares. This would correspond to a payout of $ 6,206 billion against a free cash flow of $ 13.5-14.0 billion which would indicate a payout rate of the FCF in the middle of 40%.
Image source: Simply Safe Dividends
As both my independent research and the renowned research company Simply Safe Dividends have shown, AbbVie’s dividend is reasonably safe.
The next logical question an investor can ask is how the dividend growth will be similar in the next few years?
Image source: Easily secure dividends
I expect not to increase the last 11.5% dividend. When we consider that AbbVie can increase its payout slightly and that the result is expected to increase by 9.6% annually over the next 5 years (according to Yahoo Finance, a remarkable deceleration from 20% + over the past 5 years), it seems reasonable to conclude that 9-10% increases are likely, if AbbVie could come close to the above performance calculations.
Now that we have discussed the growth and safety profile of AbbVie’s dividend, we will now dig into the basics of why I believe that AbbVie will deliver on assessments of analysts’ growth over the next few years.
Image Source: Evaluate Pharma
primary reason for my optimism towards AbbVie’s future lies in 1) the increasing global demand for prescription drugs and 2) in AbbVie’s ability to capitalize on its deep pipeline.
Although the concentration risk of Humira remains very real at pressures with about 61% of AbbVie’s net revenue derived from the blockbuster drug, the company has an ambitious yet reasonable plan to address the problems that come with a post-Humira Abbvie.
Image source: AbbVie Investor Presentation
When investors sometimes forget, AbbVie’s growth plans are not dependent on Humira’s continued success, as the management is planning for life after Humira for many years now.
The next generation of immunological drugs with Upa and Risa are the two drugs that are most pleased with the many things that AbbVie investors must be happy about.
In fact, Risa was only approved in Japan for the treatment of plaque psoriasis and psoriatic arthritis. The management also expects its strategic imperatives for highly differentiated assets to come to an end, with CEO Richard Gonzalez adding:
“We are now convinced that with risankizumab and upadacitinib we have achieved our goal, both our next generation Immunology therapies have been proven over several superior clinical trials compared to Humira and other competitive offers … We expect to start both risankizumab and upadacitinib 2019 and, based on their profiles, anticipate broad form access. “CEO Richard Gonzalez
Approval of Risa in Japan was just the first step and it’s just the beginning of many positive developments to come 2019 for AbbVie. Upa is also expected to be launched in the second half, which will be the most important contributing factors in the expected 10% adjusted diluted EPS growth for 2019.
Risa and Upa have shown great effect over all clinical trials in the late situation and as Chief Scientific Officer Michael Severino said: “We have recently announced that we have recently had a positive CHMP opinion and we are approaching the timeframe for a US approval decision. These discussions were very good.”
This is very encouraging news because the two drugs are critical to compensate for future declines in Humira.
At the same time, the oncology drug Imbruvica has already been approved for nine indications and the management targets eight more in the coming years.
Other oncological drugs, Venclexta have been approved for two indications and there are nine more planned, with a couple of those expected to come this year. Venclexta is therefore expected to double its sales this year.
Image source: Evaluate Pharma
These two oncology drugs are the other important drugs for AbbVie in the coming years, as oncology is expected to grow with an astounding double-digit interest rate until 2024.
And while the Mavyret does not turn out to be a drug of growth over the next few years, it has been shown to be very effective in treating hepatitis C with a 98% response rate. Therefore, management expects Mavyret to be a remarkable contributor to AbbVie’s revenue for the next few years.
For the above reasons, evaluation medicine has ranked AbbVie as the second best drug pipeline in the industry behind Novartis. [$19659041] $ 20 billion in total Humira sales that AbbVie led for 2018 proved to be accurate and AbbVie recorded over $ 19.9 billion in total revenue from Humira for 2018. The management has a good deal of what to expect and I is convinced that they will be able to roll with the rods in the pharma industry, so to speak.
In addition to AbbVie’s comprehensive pipeline, the secondary cause of my optimism is the AbbVie veteran leadership team led by the CEO and 40+ year veteran who goes back to their time with Abbott Labs, Richard Gonzalez. Gonzalez has been a knowledgeable CEO since taking over 2011 and has served in various roles throughout the company during his 40-year career. Chief Scientific Officer, Dr. Michael Severino also has over 20 years of industry experience. AbbVie’s management possesses the necessary knowledge and experience to steer the company through the highly complex pharmaceutical industry and its lives beyond Humira.
AbbVie has both a deep pipeline and the management necessary to fully capitalize on their pipeline, expand their drugs in each
Although AbbVie has pretty much to remain bullish, I would do readers quite unfair if I did not discuss the risks that AbbVie is facing.
After all, all equity investments face their reasonable share of the risks. AbbVie is no exception.
As with any pharmaceutical company, the threat of loss of exclusivity is one that must be taken seriously and companies cannot become self-esteem. AbbVie’s concentration risk with Humira accounts for about 61% of 2018 revenue only exacerbates and exponentially increases this risk. While the pharma business is a boom and bust cycle with patent exits that damage the company’s financial performance, it drives the company to continuously innovate, as AbbVie does.
If AbbVie cannot move on from Humira when it loses its exclusivity in the United States around 2023 (two-thirds of Humira revenue), this would damage the company’s prospects and hamper its ability to deliver on analyst estimates of high single-digit earnings growth over the coming years. years. Moreover, any significant changes in the current date around 2023 to a year or two earlier would cause problems for AbbVie.
Björnen believes that AbbVie is a single pony, so to speak and they will not be able to replicate Humira’s success and replace any possible revenue from Humira. Concentration risk and concern over AbbVie’s ability to replace lost revenue from Humira are the main reasons for AbbVie’s struggling share price from the last year and bill.
Fortunately, I don’t think AbbVie’s current reliance on Humira for revenue will end up costing them in the long run. As we discussed above, they have lots of very promising drugs with blockbuster written everywhere. Even in an industry that has uncertainty as a pharma, it only takes one or two drugs to radically transform and shape a company’s future that Humira has shown us (hopefully a couple of blockbuster drugs to reduce concentration risk).
We also cannot forget the risk that the pharmaceutical industry is very complex and some acquisitions pay off, but others like AbbVies 2016 acquisition of Stemcentryx for over $ 10 billion have proven to be a complete and complete failure, which also increased the company’s leverage. One of the highest in the industry.
Even in the probable scenario where Rova-T (a drug that has proven to be inferior to the standard of care) finally stops producing $ 0 in revenue, the $ 35 billion in non-Humira revenue expected in 2025 is adjusted for the inevitable failures of once promising drugs like Rova-T.
In another way, it would cause an abnormally large number of failures for AbbVie not to be able to continue from Humir a.
AbbVie’s debt burden, which is partly due to the failed Stemcentryx acquisition, is something that must be addressed to strengthen the company’s foundations . Fortunately, management takes the steps needed to split the balance sheet and by the end of 2019, analysts expect AbbVie’s leverage to be close to the industry average of 1.9 versus the current 2.5.
In addition, the interest coverage ratio of 8.8 and credit rating from S & P in A- shows that the company’s balance sheet is already in a decent position.
This will only improve with the launch of Upa and Risa this year, which will provide greater assurance to AbbVie’s long-term diversification strategy and revenue.
Another risk posing a threat to AbbVie is the ability of other pharmaceutical companies to bring an action against AbbVie on the basis of AbbVie’s products that violate their intellectual property rights, which could prevent AbbVie from selling a particular product at the same time as causing AbbVie incurs legal costs.
If any of AbbVie’s products lead to uncertain terms or bodily harm to any of its customers, it could not only cost AbbVie large sums of money in law and legal defense, but it could also damage AbbVie’s PR and its ability to attract and keep new customers.
We can watch Johnson & Johnson (JNJ) and their defense talc baby powder as well as $ 387.5 million to solve 25,000 cases of blockbuster blood thinning Xarelto as Exhibit A in the incredible legal costs that drug companies often face.
As with any investment in pharma or any activity in the healthcare industry for that matter, it is also a fair and growing proportion of regulatory risks that accompany an investment in AbbVie. This is probably the biggest risk for AbbVie and its competitors.
Further, AbbVie’s tumbling stock price is also aggravating concerns about any possible regular review to address the ever-increasing healthcare costs in the United States, which have taken as well as industry peers such as Pfizer (PFE) and Amgen (AMGN) are also lower.
The recently proposed US Department of Health and Human Services, requiring the abolition of drug subsidies between drug manufacturers and the pharmacy beneficiaries or PBMs, would result in a reduction in drug prices and damage the financial results of companies such as AbbVie.
Probably the biggest risk to the industry as a whole is the possibility of a “Blue Wave” in 2020. Although this did not “materialize as much in the mid-2018 election as much as expected, the warming of” Medicare for All ” The platform that most Democrats run on 2020 poses a serious risk to drugg manufacturers
Although “Medicare for All” is unlikely to be adopted after the 2020 election due to the Senate’s 60 voting rights, the move to a payer seems to be inevitable The only question is when and how exactly it will look like.
Bulk credit purchases and extensive price controls that often come with a payer healthcare system would almost certainly damage the margins of drug companies and the bladder would give pharmaceutical companies their knees.
For a more comprehensive listing of all risks with an investment in AbbVie, I would encourage interested readers to refer to “Article 1A Risk Factors” starting on page 10 of AbbVie’s latest 10-K.
Since we have established both tailwinds and headwinds for AbbVie in the coming years, we will now enter why I think AbbVie is trading at a discount to fair value .
The first method I will use to assess the value of the AbbVie share is the price of forwarding the earnings ratio. Note that for AbbVie, I use 5 years averages instead of 10+ year averages to establish a fair value baseline since the company has only been public since its 2013 spin-off from Abbott Labs.  AbbVie’s current price to redeem 8.97 profit share is positively compared to the 5-year average of 12.25 per Morningstar.
In a very conservative scenario where AbbVie commands a PE multiple of only 10, the company is currently trading at a 10.3% discount at fair value and offering up to 11.5%. This would mean a fair value of $ 86.57 per share.
Another method that I will use to value AbbVie is the current dividend yield in relation to the average exchange exchange of 5 years.
Per Simply Safe dividends, AbbVie’s monstrous 5.52% return is 52% above its 5-year average of 3.63%.
Even in a conservative scenario where we assume a more diversified item Humira AbbVie a few years from now has a fair value return of 4.25%, this would still mean a fair value of $ 100.71 at present. This suggests that AbbVie trades at a 22.9% discount at fair value and offers 29.7% up.
The final method I will use to evaluate AbbVie’s fair value is the payout discount model or DDM.
Image source: Investopedia
The first entry of expected dividend per share in DDM is surprisingly the simplest, since the information can be found in seconds. In the case of AbbVie, the annual dividend per share is $ 4.28.
The second entry to the cost of equity is another term for the required return. This can vary greatly from one investor to the next based on preferences, but I prefer to earn at least 10% annual total return over the long term, as it historically outperformed the broader market.
The third and last entry in DDM is also the most uncertain. However, I believe that a very conservative growth estimate for the long-term dividend is 5.5% (well below the company’s previous growth and future growth estimate), which really shows how undervalued AbbVie is right now.
Even with a dividend growth rate as low as above, the fair value of the AbbVies share is still $ 95.11 per share. This would mean that AbbVie trades at 18.4% discount at fair value and offers 22.5% up.
When we average the three actual values together, we come to a fair value of $ 94.13. This suggests that AbbVie trades at a 17.5% discount at fair value and offers 21.2% up.
With a return of 5.5%, AbbVie is currently offering investors an incredible opportunity to either add their position if they are not quite important or to initiate a position.
While returns are extremely high and investors must always be cautious of “sucker” exchanges, AbbVie is not a sucker exchange. AbbVie nevertheless has a good pipeline with several drugs with legitimate blockbuster potential and the management to take advantage of the strong pipeline.
Moreover, AbbVie is a good company to trade at a significant discount to fair value. The fact that a company with AbbVie’s potential is also close to a 20% discount to fair value in a market that has experienced a huge upturn in recent months is like icing on the cake for investors with long-term thinking and the risk tolerance required for an investment in AbbVie.
Between 5.5% yield, a conservative 10-year earnings growth of 6-7% and 1.9% annual multiple expansion, AbbVie is likely to deliver 13.4-14.4% total return over the next decade , which gives a great alpha in the process.
Notes: I am / we are long ABBV. I wrote this article myself and express my own views. I do not get compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.