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Better Buy: Abbott Laboratories vs. AbbVie

By Keith Speights - Jan 19, 2020 at 7:03AM

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Which stock wins in a matchup between these two healthcare siblings?

You'd have to rank Abbott Laboratories' (ABT 1.77%) spin-off of AbbVie (ABBV -0.51%) in 2013 as one of the best corporate moves of the last decade. Since the separation, Abbott's share price has soared 184%, while AbbVie stock is up 158%.

Which stock is the better pick now for long-term investors? Here's how Abbott and AbbVie stack up against each other.

Businessman with hand on the back of his head looking at a wall with arrows pointing left and right.

Image source: Getty Images.

The case for Abbott Labs

Abbott Labs focuses on four key markets. The company makes the most money selling cardiovascular and neuromodulation products. It also has big businesses that sell nutritional products and diagnostics systems. In addition, Abbott retained an established pharmaceuticals unit after its spin-off of AbbVie that focuses primarily on emerging markets. 

The company continues to deliver solid growth, with revenue rising 5.5% in the third quarter and earnings jumping 12% from the prior year. Abbott's biggest segment is also its fastest-growing business: Its cardiovascular and neuromodulation products unit achieved 10.6% organic growth in the last quarter.

Wall Street analysts think that Abbott will be able to deliver average annual earnings growth of more than 11% over the next five years. The company has several growth drivers that should make this possible, including its Alinity diagnostic systems, HeartMate 3 left ventricular assist devices, MitraClip mitral regurgitation devices, and FreeStyle Libre continuous glucose monitoring (CGM) systems.

On top of this strong growth, Abbott also pays a nice dividend -- it currently yields nearly 1.7%. And in December, Abbott increased its dividend for the 48th consecutive year.

All of this great growth has given Abbott a somewhat pricey valuation, though. Shares currently trade at around 24 times expected earnings. But with Abbott's great prospects and strong dividend track record, paying a premium for this blue chip stock is to be expected.

The case for AbbVie

AbbVie claimed all of the prescription drugs with higher growth prospects when it was spun off. The most important of these drugs was Humira, which still ranks as the best-selling drug in the world and is likely to remain in the top two until 2024.

However, Humira now faces biosimilar competition in Europe, with biosimilars on their way to the U.S. market in 2023. AbbVie can't rely on the blockbuster drug for growth as it has in the past. The good news is that the company has a strong lineup, including cancer drugs Imbruvica and Venclexta along with new immunology drugs Rinvoq and Skyrizi.

But with analysts expecting weak average annual earnings growth of less than 4% over the next five years as Humira's sales wane, AbbVie knew it needed to do something different. That's why the drugmaker is acquiring Allergan (AGN) for $63 billion. The deal will bring the enormously successful Botox into AbbVie's arsenal along with promising newer drugs including Vraylar.

While AbbVie's growth prospects are somewhat shaky, its dividend definitely isn't. The company's dividend yield stands at a mouthwatering 5.4%, making AbbVie one of the most attractive high-yield dividend stocks on the market.

AbbVie's shares trade at only 9.4 times expected earnings, one of the lowest valuations among big healthcare stocks. However, the valuation isn't as appealing when looking over a longer period, with Humira facing the prospect of slumping sales in the wake of biosimilar competition in the U.S. market. Still, though, with the company's terrific dividend and modest growth prospects that should be bolstered with the Allergan acquisition, many investors will likely think that the price is right for AbbVie.

Better buy

Which stock is the better pick? My answer is that it depends on your investing goals.

Growth investors will prefer Abbott Labs. The company should enjoy a big sales boost if and when the FDA clears the way for the new version of FreeStyle Libre to hit the U.S. market. However, I think that income investors will prefer AbbVie's sizzling yield. Even with the company's Humira challenges, my view is that AbbVie will keep the dividends flowing and growing for a long time to come.

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Stocks Mentioned

Abbott Laboratories Stock Quote
Abbott Laboratories
ABT
$109.88 (1.77%) $1.91
AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$153.50 (-0.51%) $0.79
Allergan plc Stock Quote
Allergan plc
AGN

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