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This Warren Buffett Dividend Stock Is Still Dirt Cheap

By Keith Speights – Aug 27, 2021 at 5:52AM

Key Points

  • This stock in Berkshire Hathaway's portfolio is a Dividend Aristocrat that trades at only 9.6 times expected earnings.
  • The company faces a big challenge within the next two years, but there are reasons to be optimistic that it could win through the end of the decade and beyond.

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The Oracle of Omaha has already made a great return from his investment in this big pharma stock.

Warren Buffett might not be as much of a value investor as he once was. However, he still likes to get a good bargain for the stocks added to Berkshire Hathaway's (BRK.A 0.05%) (BRK.B 0.13%) holdings.

The legendary investor also seems to prefer dividend stocks -- even though Berkshire itself has never paid a dividend. Most of the stocks Berkshire owns offer dividends.

There's one dividend stock in Berkshire's portfolio that especially looks attractive right now. AbbVie (ABBV -1.76%) is a Dividend Aristocrat with 49 consecutive years of dividend increases. Its dividend yield currently stands north of 4.3%. And even better, this Buffett dividend stock is still dirt cheap.

A bag with "dividends" printed on it beneath an umbrella.

Image source: Getty Images.

Buffett's bargain

Berkshire first scooped up shares of AbbVie in the third quarter of 2020. The big pharma stock traded on average at close to nine times expected earnings during the period. By comparison, Berkshire's own shares traded at a forward earnings multiple of more than 25 throughout most of the third quarter last year. 

We don't know exactly when Berkshire first bought AbbVie stock during Q3 of 2020. If purchases were made at the peak price during the quarter, Berkshire is now sitting on a gain of close to 20%. However, if the transactions were completed near the low price for AbbVie during the period, Berkshire's gain is more than 40%. No matter how you look at it, Buffett found a bargain.

Even with the big gains, though, AbbVie's valuation remains attractive. The stock currently trades at 9.6 times expected earnings. The forward earnings multiple for the S&P 500 index is just under 21. Healthcare stocks in the S&P 500 trade on average at 17.6 times expected earnings. The average forward earnings multiple for pharmaceutical stocks stands at 15.   

Behind AbbVie's low valuation

Why is AbbVie stock so cheap? There are two main reasons.

Most importantly, AbbVie's crown jewel will soon lose its luster. Humira has been its top-selling drug since the company was spun off from Abbott in 2013. The autoimmune disease drug has even reigned for several years as the best-selling drug in the world.

However, Humira will face biosimilar rivals in the U.S. market beginning in 2023. Its sales will almost certainly plunge. Biosimilars are already on the market in Europe. As a result, Humira's international sales have fallen from $6.25 billion in 2018 to $3.7 billion in 2020. A similar sales decline in the U.S. will be a big blow for AbbVie, since Humira generated more than 36% of its total revenue in the company's latest quarter.

The second key reason behind AbbVie's low valuation is related to the impending challenges for Humira. AbbVie believes that it can largely offset the lower sales for Humira with its other products. But the company must secure regulatory approvals for new indications for several drugs that are already on the market to achieve this goal. AbbVie faces risks that it won't be able to pick up the needed regulatory wins.

For example, the U.S. Food and Drug Administration (FDA) has delayed its approval decisions for Rinvoq in treating psoriatic arthritis, ankylosing spondylitis, and atopic dermatitis. The drug has already been approved by the FDA for treating rheumatoid arthritis. However, AbbVie's hopes to make up for declining sales of Humira could be dashed if Rinvoq fails to gain these additional approvals. 

Reasons for optimism

AbbVie President Mike Severino said in the Q2 conference call in July that the company remains confident that Rinvoq will win approvals in the three indications for which the FDA has delayed decisions. He noted that the FDA hasn't requested any additional safety data, which could be interpreted as a positive sign.

The European Commission recently approved Rinvoq in treating atopic dermatitis. The drug has already won European approvals as a treatment for rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis. 

AbbVie isn't solely dependent on Rinvoq, though. The company has great expectations for another autoimmune disease drug, Skyrizi. It also looks for antipsychotic drug Vraylar to generate peak sales of close to $4 billion and for its two migraine drugs, Ubrelvy and atogepant, to each achieve peak sales of over $1 billion. Several other current blockbusters should also enjoy continued momentum, notably including blood cancer drugs Imbruvica and Venclexta.

The big drugmaker projects that it will quickly bounce back from lower overall sales in 2023 when biosimilars to Humira enter the U.S. market. Over the second half of this decade, AbbVie expects strong revenue growth. With those prospects combined with a great dividend, Buffett's investment in AbbVie seems likely to pay off in an even bigger way over the long term.

Keith Speights owns shares of AbbVie and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

Stocks Mentioned

AbbVie Stock Quote
$163.06 (-1.76%) $-2.93
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$463,000.02 (0.05%) $220.02
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$306.39 (0.13%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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