Inflation is rampant. Treasury yields are rising, and the Federal Reserve is expected to raise interest rates multiple times in 2022. Many growth and technology stocks are getting hammered as a result, and investors are looking for a safe haven. In the case of AbbVie (ABBV 0.25%), look no further.
AbbVie is a global prescription drug developer, manufacturer, and distributor that was spun off from parent company Abbott Labs back in 2013. Its stock is trading near all-time highs as analysts and investors begin to see management's vision taking shape. Risks that were previously thought to be serious enough to hamper results are being managed well. The company is making record revenue, and the dividend is safe and growing. The stock has recently risen substantially from under $110 per share in October 2021 to over $131 now; however, there's still room for this stock to reward investors in 2022.
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Risks are being managed well
Many people know AbbVie as the company that makes the blockbuster biologic drug Humira which treats a long list of health conditions. And for good reason: In fiscal 2019, Humira sales accounted for 58% of the company's sales. This could be a precarious situation, as companies attempt to bring generic drugs and biosimilars to market. In fact, a biosimilar competitor to Humira was released in Europe in late 2018 resulting in a 31% drop in international sales of Humira in 2019. It is expected that the same results will be seen when biosimilar medications are released in the U.S. in 2023.
With this in mind, management must start replacing this revenue stream. To that end, AbbVie acquired Allergan in 2019 to bolster revenue and create a pharmaceutical powerhouse. Allergan is best known for its Botox franchise, although it also has several other revenue-generating products on the market. Next, AbbVie released Skyrizi and Rinvoq, two medications that are now expected to provide a combined $15 billion in sales by 2025. There was concern in December when the FDA added a warning to Rinvoq among other medications in the class of JAK inhibitors. This reaffirmation of guidance is a clear signal that the company is not concerned that the FDA safety label requirements will hurt sales in any meaningful way.
Another potential risk for AbbVie is that legislation will crimp results by limiting the company's pricing power, patent protections, or both. Congress is keen to talk about lowering drug prices though it struggles to agree on how to do this. Hearings were held in 2021 in which AbbVie's CEO Richard Gonzalez testified. Drugmakers spend billions of dollars on the research and development of new drugs, and many of them do not ever come to market. When a drug is successful, the company and its shareholders expect large returns. While the threat of legislation is still active, Congress is as polarized as ever, and the likelihood of action that would severely hamper AbbVie's results seems minimal.
Shareholders reap the rewards
Because of the aforementioned risks, AbbVie often trades at a discount to fair value. This allows savvy investors to snag a higher dividend yield. The current yield stands at over 4%. AbbVie has raised the dividend for eight straight years and this will likely continue. The current dividend payment is $1.41 per quarter. While the market adjusts to the macroeconomic conditions of 2022, investors can relax and bank dividends from AbbVie without worrying about short-term stock price movements.
ABBV Total Return Level data by YCharts
In the long term, the stock price will likely rise as well. The stock is valued at a reasonable forward price-to-earnings ratio near 10. The company has posted record revenue for the first nine months of 2021, at $41.3 billion. This is 29% higher than over the same period in 2020. Even better, Humira accounted for only 39% of sales for the third quarter of 2021. This shows the tremendous progress that management has made in diversifying revenue streams. As Rinvoq and Skyrizi sales ramp up, this number will continue to decrease.
Despite the looming patent cliff, AbbVie looks safe
AbbVie's management is seemingly doing everything correctly. Revenue is growing significantly, while the percentage of revenue received from Humira sales is declining. The Allergan acquisition has provided additional products, and now Rinvoq and Skyrizi are expected to carry the torch, reaching $15 billion in combined sales in just a few years. Due to the nature of the business, there are always patent cliffs and potential legislation to contend with. However, AbbVie continues to be highly successful. Long-term investors can buy AbbVie for the 4% yield and hold for the rising dividend and share price.
