Pharmaceutical company AbbVie (NYSE:ABBV), best known for its rheumatoid arthritis drug Humira, has been very good to its investors since becoming a public company. In January, shares were hovering around $34 but are now around $48. Those familiar with AbbVie know that it has one overarching issue: over-reliance on Humira, which represented more than 50% of revenues last year. This blockbuster drug should continue to gain market share and broaden geographic penetration for the next few years, propelling AbbVie's earnings along with it. But Humira's patent is good only until 2017, and afterwards it may be open to generic competition.
When AbbVie was split off from Abbott Labs, it didn't really have an answer to the Humira patent cliff at the time. But back then AbbVie also traded at single-digit multiples, it offered a yield of about 5%, and it was a solid four years before its patent expired. That was an attractive risk-reward proposition.
Right now, AbbVie is at a less exciting 15 times earnings and yields only 3.35%, and Humira's expiration is now only three years out. That is a much less attractive risk-reward. And now that AbbVie has run up some 37% from the beginning of the year, we can assume the market has finally got this one fairly priced. Those who have been long since the spinoff may want to do some rebalancing.
Health care alternatives
For those looking into dividend-yielding health care alternatives, perhaps the most obvious choice would be Johnson & Johnson (NYSE:JNJ). J&J has a lot going for it. In its last earnings report, the company was able to grow operational income by 7.1% and earnings per share by 8.8%.
One contributing factor was a strong, diversified pharmaceutical pipeline with many new drugs. This segment of the company is growing revenue by double digits now, with more than half a dozen drugs each contributing. Add to that double-digit companywide sales growth in Brazil, Russia, India, and China, as well as a stable consumer products business and steady 2%-4% growth in medical devices, and the big picture looks great. What we have with J&J is impressive growth from a number of businesses and geographies, all taking advantage of one overarching trend: an increasing need for health care services around the world. That growth comes at much less of a risk than that of a company getting the majority of its revenue from just one brand such as AbbVie has with Humira.
Unfortunately, J&J is also pricier than AbbVie. It now trades at 17 times earnings, a multiple nearly two times its latest growth rate, with a yield of 2.9%.
So let's try something else: AbbVie's former colleague of sorts: Abbott Labs (NYSE:ABT). Abbott was the medical device and consumer arm of the conglomerate that once included AbbVie. Like J&J, Abbott is growing earnings by high single digits to low double digits.
Also like J&J, Abbott's growth comes from secular tailwinds in a few businesses, all of which are taking advantage of an increasing aging population. To break it down, Abbott's established pharmaceutical sales are growing in the mid- to high teens. Its medical device sales are growing strongly in vascular, vision, and diabetes care. Diagnostics will grow especially fast in Brazil, China, and Russia. In fact, those first two countries are growing revenue by double digits. But Abbott's best performing business is perhaps nutrition. The global nutrition business is expected to grow from $36 billion to $51 billion between 2011 and 2016, and Abbott is really leading the way with No. 1 brands in both children's and adult nutrition.
With Abbott, you get that long-term growth from a broad mix of health care as with J&J, but at a lower multiple of only 14.4 times earnings. Conservatively assuming an 8% growth rate, this gives us a more reasonable PEG ratio of 1.8. While Abbott's dividend is relatively low at 2.4%, it has much more room to run than the other two: Its dividend is only 40% of earnings per share. And just last week management announced a fantastic 50% dividend boost. If you're looking to swap out your AbbVie shares for another health care name, take a look at its former colleague, Abbott Labs.
Casey Hoerth owns shares of Abbott Labs and AbbVie for a family account. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.