Gilead Sciences (GILD 0.91%) claims one of the top-selling drugs in the world with Harvoni. But AbbVie (ABBV 1.06%) markets the best-selling drug in the world -- Humira. Gilead Sciences is one of the biggest biotechs on the planet, with a market cap of around $95 billion. But AbbVie is even bigger, with a market cap topping $112 billion.
There's one other key area where AbbVie holds an advantage over Gilead -- dividends. Both companies pay out dividends with attractive yields. However, here are three reasons why AbbVie is a better dividend stock than Gilead Sciences.
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1. The obvious
First is the obvious reason: AbbVie has a higher dividend yield. Gilead's dividend currently yields 2.88%. That's not bad at all. AbbVie, however, claims a dividend yield of 3.66%. It's not even close between the two companies.
What's more, this isn't a temporary advantage for AbbVie. The drugmaker's dividend yield has been significantly higher than Gilead's yield from the very beginning.
ABBV Dividend Yield (TTM) data by YCharts.
2. The not-so-obvious
There's also a not-so-obvious reason why AbbVie is the better dividend stock. If you compare the two companies' payout ratios, Gilead Sciences appears to be in better position for big dividend increases in the future. While AbbVie is using 59% of earnings to fund its dividend program, Gilead is using less than 22% of its earnings to pay out dividends. Despite the lower payout ratio, though, AbbVie could actually be in better shape for future dividend hikes.
For one thing, the earnings trajectories for these two big biotechs are going in different directions. AbbVie is expected to grow earnings by 14% over the next five years. Gilead's earnings are projected to fall by an average annual rate of more than 8%, due to a continued decline in sales for its hepatitis C franchise.
More important, though, is that Gilead Sciences has a more pressing need to use its cash stockpile and cash flow for making acquisitions. The company's CEO John Milligan has said that Gilead wants to make a "transformative" acquisition. That means a big deal with a big price tag.
I expect that both AbbVie and Gilead Sciences will remain committed to their dividends. Future dividend increases are likely for both companies. However, Gilead has a more important use for its cash than boosting the dividend by a large amount. That's something that most of its shareholders will fully understand and not be upset about.
3. The past
Some might think that, since history doesn't repeat itself, it's not important. However, when it comes to dividends, the past is very important in evaluating motivations and priorities for companies. AbbVie's past track record for dividends gives it another advantage over Gilead Sciences.
Gilead initiated its dividend program in 2015. The company increased its dividend in both of the following years. AbbVie technically initiated its first dividend in 2013 after its spinoff from Abbott Labs. Since then, AbbVie has increased its dividend by 60%.
However, AbbVie's cultural commitment to dividends goes back to its days as part of Abbott Labs. Including the period prior to its spinoff, AbbVie has increased its dividend for a remarkable 44 consecutive years, landing it a place among the elite group of Dividend Aristocrats.
For some stocks, the dividend becomes something of a sacrosanct component of its investing premise. I think that's the case for AbbVie, with its rich tradition of dividend increases. Gilead doesn't have that tradition -- at least not yet.
The potential game changer
There's one thing, though, that could threaten AbbVie's ability to keep its reputation for a strong dividend. Nearly two-thirds of the company's total revenue stems from Humira. A huge decline in sales for the drug would seriously weaken AbbVie and its ability to fund the dividend program at current levels.
A potential threat for Humira looms like a dark cloud over AbbVie already. Amgen (AMGN 2.35%) won Food and Drug Administration approval last year for Amjevita, its biosimilar to Humira. AbbVie has taken Amgen to court over potential patent infringement. As a result, Amgen hasn't launched Amjevita in the U.S. yet. The trial is scheduled to begin in November 2019. AbbVie thinks that it will be successful in fending off U.S. rivals to Humira through 2022.
It's unknown just how big an impact biosimilar competition would have on sales for Humira. Even if AbbVie loses in court, the company's dividend probably wouldn't be negatively impacted in the short run. However, the risk to Humira isn't one investors should ignore. In the meantime, though, AbbVie's dividend appears to be safe, growing -- and better than Gilead's.
