What does every retired investor want in a stock? You'd definitely expect a strong dividend to be ranked close to the top of the list. Retired investors would also want to make sure that the company was in good shape to keep those dividends flowing, with dividend growth a nice bonus. And it wouldn't hurt for the stock to have decent growth prospects.
Several stocks check off all these items. But one stock that I think especially stands out is AbbVie (ABBV 0.89%). Here's why this big pharma appears to be a retiree's dream stock.
A fantastic -- and growing -- dividend
Let's start with AbbVie's dividend. It currently yields nearly 5.6%. That's not only one of the highest yields in healthcare, but it's also one of the highest dividend yields in the S&P 500.
AbbVie's track record when it comes to dividends is impeccable. The company is included in the elite group of stocks known as Dividend Aristocrats. Including the time that it was still part of its parent company, Abbott Labs (ABT 0.44%), AbbVie has increased its dividend for 47 consecutive years.
Abbott Labs spun off AbbVie as a separate entity in 2013. Since then, AbbVie has boosted its dividend payout by a whopping 168%.
The company appears to be in a strong position to keep the dividends coming. AbbVie currently uses a little over half of its free cash flow to fund the dividend program.
Based on AbbVie's current dividend level and its history of dividend growth, I fully expect that the dividend will double within the next seven years. This would mean that investors could be looking realistically at annual dividend payments that are at least 10% of their initial investments in the not-too-distant future. Any retiree would love to have an effective dividend yield of 10% or more.
Multiple growth opportunities
A lot of the focus for AbbVie right now is on the declining sales for Humira. The company's best-selling drug now faces competition from biosimilars in Europe and will see biosimilar rivals in the U.S. beginning in 2023. But even though Humira generates 57% of AbbVie's total revenue, the company isn't worried about the falling sales for its top drug.
AbbVie has known for years that the day would come when it couldn't count on Humira to deliver growth. It has been preparing by building a product lineup and pipeline that could take it into a post-Humira world.
One key step that AbbVie made was to acquire Pharmacyclics in 2015. The deal gave AbbVie two powerful cancer drugs, Imbruvica and Venclexta. The company thinks that these two drugs will together generate more than $9 billion of risk-adjusted annual sales growth by 2025.
AbbVie has also partnered with other companies to boost its growth prospects. It teamed up with Neurocrine Biosciences (NBIX -2.27%) to develop and market Orilissa. The drug is currently approved for the management of endometriosis pain. AbbVie hopes to pick up another approval for the drug in treating uterine fibroids. If all goes as expected, Orilissa could contribute an additional $2 billion in annual sales for AbbVie in a few years.
The biggest near-term growth opportunities for AbbVie, though, are with its new immunology drugs. Skyrizi won FDA approval earlier this year for treating plaque psoriasis. AbbVie expects to win FDA approval for upadacitinib in the third quarter of 2019 for treating rheumatoid arthritis. Market research company EvaluatePharma ranked the drugs No. 3 and No. 2, respectively, in its analysis of the top new drug launches of this year. AbbVie thinks the two drugs could together rake in $10 billion annually by 2025.
Risks offset by an attractive valuation
AbbVie faces some risks. It's possible that the company could experience pipeline setbacks. Major healthcare system changes in the U.S. could restrict the ability for AbbVie to set its drug prices at the levels it prefers.
However, I think that AbbVie's valuation largely offsets these risks. The big pharma stock trades at less than 8.4 times expected earnings. That's lower than the forward earnings multiples of more than 440 other stocks in the S&P 500.
AbbVie provides a strong dividend, solid growth prospects, and an attractive valuation. That's a combination that should appeal to retired investors -- and investors who are a long way from retirement, too.