Investors often have reservations about buying stock in a company that's trading at (or near) its all-time high. And with a bull market that continues to trend upward, this is the dilemma many of us have faced for almost a year now. But there is one stock in particular that I think is cheap, easy to understand, and capable of rewarding shareholders with ample returns in the future: AbbVie (ABBV 0.08%).
There's one investing mantra I always try to live by: "It's a market of stocks, not a stock market." This essentially means that whatever "the market" overall is doing, bullish or bearish, you can always find individual companies trading at attractive prices. While many of the businesses on the market today don't have the earnings or the growing cash flows to justify their valuations, AbbVie is a different story. Here's why it is not too late to buy AbbVie stock right now.
A cash-flow generator time and time again
AbbVie is one of the newer pharmaceutical companies on the market. It was spun off from Abbott Labs in 2013 into a competitive landscape that included the likes of Johnson & Johnson, Pfizer, Merck, and Bristol Myers Squibb. However, management wasted no time developing breakthrough drugs and driving sales to generate huge returns for shareholders. Since its spinoff, AbbVie has been at the forefront of the creation of new drugs as well as a leader in overall sales.
AbbVie's front-line products, including Humira (for Crohn's disease and other indications), Skyrizi (for psoriasis), and Rinvoq (for rheumatoid arthritis), have all helped drive returns of nearly 350% since inception. (Humira was the world's best-selling drug in 2019, with revenue of nearly $20 billion.)
Such blockbuster drugs have contributed to compound annual revenue growth of 13.5%. Additionally, shareholders have seen tremendous dividend growth, with the current payout of $1.30 per share representing a 225% increase from 2013.
Fears of Humira's patent expiration are overblown
Some investors may be staying away from the stock because of concerns that AbbVie relies too much on its flagship drug, Humira. But I believe those fears are unwarranted. Humira remains AbbVie's best-selling drug, accounting for about $5 billion of the company's $13.8 billion in sales during the fourth quarter of 2020. In 2020 alone, we saw its domestic sales numbers continue to increase by 13.7%, and there's no sign yet of significant competition to erode market share.
In fact, Humira has remained dominant in Europe even after going off-patent in the EU, managing to retain 70% of its patients. This was possible thanks to the company's ability to discount the price to discourage competition. Given that Humira's U.S. patents begin to expire in 2023, some investors have worried that AbbVie will take a big hit.
But the company has already shown that it's willing to cut prices to deter competition -- and that competition may not be compelling anyway. The biosimilars that have been approved so far have failed to lower costs or make therapy more accessible for patients. Ultimately, doctors and pharmacists have not seen the new biosimilars proven out yet, and if Humira can compete with their prices, it is hard to see many physicians shifting away from the highly successful drug.
As a whole, AbbVie is much more than Humira. The company's acquisition of Botox maker Allergan in 2020 brought it a whole new line of industry-leading products -- Botox has a 66% market share, according to the company, and other offerings, including Juvederm (fillers), CoolSculpting (body contouring), Natrelle (implants), and AlloDerm (regenerative tissue), are all No. 1 in their spaces, too.
AbbVie also expects its two new drugs, Skyrizi and Rinvoq, which together have already done $2.2 billion in 2020, to account for a combined $15 billion in global sales by 2025.
A great time to buy
In today's market, overvaluation is the norm. But this stock proves that there are still bargains to be found. It generates superb cash flows and offers a 5% dividend yield to reward investors; in fact, the stock price was up 20% recently after management's most recent (10%) dividend raise.
With the continued success of Humira, Skyrizi, and Rinvoq, I expect AbbVie to grow revenue at 10% annually -- or more -- until at least 2023. Over time, stock prices correlate with earnings, so AbbVie can easily rise 10% or more per year from here.
At a price-to-earnings ratio of less than 10 (compared with its average of about 13), AbbVie is currently on sale. This stock satisfies investors with a variety of goals. Whether you want to beat the market or add extra dividend income, AbbVie is the stock to buy.