Better Dividend Stock: Amgen, Inc. or AbbVie Inc.?

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Investing in dividend stocks certainly might appear simple with more than 1,900 companies with a market cap of $300 million or higher paying some form of dividend within the past 12 months. With dividends often viewed as a measure of a company's financial health, seeing this number could make an investor falsely believe they could simply throw a dart at the business section of their local newspaper and nab a dividend winner.

However, the truth is a far cry from this reality. In actuality a number of dividends aren't worth the checks they're printed on, either because the dividend itself isn't sustainable, the business model isn't sustainable, or the dividend is just downright minuscule. This isn't to say there aren't a number of great dividends to choose from, but it takes some digging beyond the surface to uncover them.

How do you uncover great dividends you wonder? The answer can be found in analyzing the growth, value, and sustainability of a company relative to its peers.

Within the healthcare industry, for instance, solid dividends are quite the rarity, so when one comes along it needs to be thoroughly scrutinized, especially considering the finite lifespan of pharmaceutical products. Today we'll take a closer look at both Amgen (AMGN 1.11%) and AbbVie (ABBV 0.89%) and determine which company is truly the better dividend stock for investors.

Growth
The first differentiating factor that should be examined when choosing between dividend stocks is whether or not there's meaningful growth behind a company. If a company isn't growing its sales and profits it's conceivable that its dividend won't grow over time. Therefore, understanding how healthy a business really is can go a long way to establishing the quality of its dividend. In the case of Amgen and AbbVie we're presented with a mixed scenario.

Amgen's flaw is that it has struggled to produce meaningful organic growth for more than a decade. The company's best-selling sister drugs, Neulasta/Neupogen, which are given as white blood cell maintenance therapies during chemotherapy treatments, have seen sales flatten out, while Enbrel in the rheumatoid arthritis market is running into a mound of competition, slowing its growth rate.

AbbVie's "flaw" is that the company is overly reliant on its rheumatoid arthritis drug Humira, which is on pace for nearly $12 billion in sales this year and is the best-selling drug in the world. Growth has not been an issue for AbbVie, with sales up 5% year over year in the second quarter. However, with Humira's exclusivity set to be lost in December 2016, AbbVie's revenue stream, of which 62% of sales have come from Humira, will be at risk. 

Amgen investor presentation. Source: Amgen.

On the flipside, both companies have supplemented their outlooks with key acquisitions. Amgen purchased cancer drug developer Onyx Pharmaceuticals for a whopping $10.4 billion last year in order to get its hands on the company's multiple myeloma cancer drug Kyprolis, as well as a number of other developing cancer compounds. Because there's still so much research left to be done focusing on improving cancer patients' quality of life, this acquisition should be a profitable purchase for Amgen.

Similarly, but to an even bigger extent, AbbVie pursued Shire (NASDAQ: SHPG) and got the A-OK from Shire's board of directors after its fifth bid with a monstrous $54 billion price tag. In addition to diversifying AbbVie's product line beyond Humira with a handful of rare disease and orphan drugs, Shire's Ireland-based address will allow AbbVie to relocate its headquarters overseas and save substantial profits due to lower corporate taxes.

AbbVie investor presentation. Source: AbbVie.

Based on this relatively even scenario I'm not declaring either company the winner of the growth category.

Value
Secondly, dividend investors want to feel that they're getting a good value as well when they buy a dividend stock. Generally speaking it's often difficult to establish value comparisons in the healthcare sector because so many companies are being valued on their future sales potential rather than their tangible cash flow or forward earnings. However, in this instance we're dealing with two well-established biopharmaceutical companies that could lead to fruitful insight by comparing some important metrics.

Here are a few data points you should know about these two biopharma companies:

Source: Yahoo! Finance. TTM = trailing 12 months.

If you were hoping that the valuation metric would help provide some differentiation between these companies, think again.

Amgen does hold a modest profit margin benefit of four percentage points and has a slightly smaller PEG ratio, which implies a mildly stronger five-year growth projection from Wall Street. On the other hand, AbbVie is carrying a smaller net debt balance and is less expensive with regard to total sales. In other words, we have two stalemates through two categories.

Sustainability
The last thing investors should consider when analyzing dividend stocks is whether or not the business model and dividend offer sustainable growth 10, 20, or even 30 years down the road. Analyzing long-term sustainability isn't always the easiest thing to do with drugmakers, but looking a decade down the horizon shouldn't be out of the question. And perhaps the best news is that finally there is some differentiation between these two companies in this category.

While AbbVie is delivering substantial profits now, the loss of Humira is going to sting in a big way come 2017, its first full year without branded protection. As is often the case generic drugs will take roughly 80% or more of all sales within the first three years. Since nearly $6 billion in Humira's sales are tied to the U.S. market it's going to be extremely difficult for AbbVie to replace this lost revenue, even if its hepatitis C direct-acting antiviral combo drug is approved by the Food and Drug Administration.

Amgen, however, while challenged by disappointing Kyprolis results in the FOCUS study, has 10 late-stage catalysts that it'll deliver results on through 2016. The way I view biopharmaceutical pipelines is like a home run hitting contest where each experimental drug is the equivalent of a pitch. In this instance Amgen is being given 10 instances to hit one or two home runs. These "home runs" should be more than enough to sustain its growth and its dividend, which as you can see below, has been cleared for takeoff!  

AMGN Dividend data by YCharts

The better dividend stock is...
Even though AbbVie's projected yield of 3.2% looks far juicier than Amgen's 1.9% dividend yield, the truth of the matter is that Amgen is the better dividend stock. Amgen still needs to prove it can actually deliver on some of its late-stage compounds, but at least it's finally hit that point where we could see its organic growth surge. AbbVie's hepatitis C direct-acting antiviral will certain help ebb some of its Humira woes, as will the Shire buy, but I'd consider the company no lock to be able to keep its payout where it is now.