With 2021 net revenue estimated at $56.2 billion, AbbVie (ABBV -0.62%) is one of the world's most successful pharmaceutical companies. And given its massive pipeline of late-stage, drug-development programs in immunology, oncology, and aesthetics, the company likely has the opportunity to keep growing at a steady pace for years regardless of what's going on in the market or the economy.
But no stock is without flaws, and it behooves investors to understand both a company's strengths and weaknesses. Let's take a peek at two compelling reasons to buy the shares of AbbVie and one significant reason it might be better to avoid or sell -- so that you'll know whether any potential tribulations in the near future are worth the potential upside down the road.
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It's attractively priced
You wouldn't buy a car without assessing whether the vehicle is worth the asking price, and it follows that you shouldn't buy a stock without examining its valuation. At the moment, AbbVie's shares are priced such that they are neither a bargain nor overpriced.
Currently, its price-to-earnings (P/E) ratio of 30 is just about the same as the pharmaceutical industry's average P/E. In contrast, its price-to-sales (P/S) ratio is just over 4, which is a touch lower than the industry's average of 4.79.
That means investors don't need to worry much about overpaying for the stock. Moreover, there is less risk of AbbVie's shares plummeting as a result of an inflated valuation collapsing in the face of shifting market conditions. And so both of those factors contribute to making the company a good purchase.
It pays a hearty and growing dividend
Though a dividend shouldn't be the only reason to buy a stock, a healthy quarterly payout can still be a great bonus that can help to shore up your cash holdings over time.
In this vein, AbbVie's forward dividend yield is currently 4.24%, which is quite strong in comparison to many other pharmaceutical stocks of similar size. And over the past five years, its dividend payout has risen by 120%, which is quite a rapid pace. In the same period, the company's quarterly free cash flow (FCF) expanded by 285%.
As long as its FCF keeps expanding at that pace, management won't have any trouble continuing to hike the dividend each year. In fact, management has explicitly stated that it aims to continue to raise the dividend over time. That, of course, benefits its stockholders.
But it's biggest drug is losing exclusivity
Now, we come to the elephant in the room. In 2023, remaining exclusivity protections will expire for Humira, AbbVie's drug for treating arthritis. It's also AbbVie's biggest moneymaker. Humira was initially approved in 2002, but thanks to years of work in expanding its indications with clinical trials, it treats quite a few different conditions today, including rheumatoid arthritis, ulcerative colitis, ankylosing spondylitis, and plaque psoriasis, among others.
In the third quarter of 2021, Humira brought in $5.42 billion in net revenue from global sales, $4.61 billion of which is attributable to the U.S. But biosimilar competition has already started to erode its market share, and so over the next few years Humira's contribution to the top line will taper more and more sharply.
To address this massive issue, the company is planning to push development of two of its already approved immunology drugs, Rinvoq and Skyrizi. The two medicines are approved for several of the same indications held by Humira, and AbbVie is investigating a slew of additional indications to increase their revenue-making potential even further.
Management predicts that by 2025, Skyrizi and Rinvoq will earn more than $15 billion in revenue, making the combined income from the pair more lucrative than Humira was at its peak. Until then, it seems all but guaranteed that the company's revenue will face severe pressure. If you're not keen on sticking around to find out whether management's plan is going to work, it's probably a good idea to sell the stock.
