The market has had to deal with a variety of concerns through the first five months of this year. This has led the S&P 500 index to dip 14% through May.
The exodus out of growth stocks has been marked by particularly strong demand for high-yield dividend stocks. The pharma stock AbbVie (ABBV 1.05%) has gained 9% as of the end of May, but still looks like it's a buy. Here are three reasons why.
1. Outperforming analysts' forecasts
When AbbVie reported its first-quarter results on April 29, they topped analysts' consensus forecasts. AbbVie recorded $13.5 billion in net revenue during the quarter, up 4.1% over the year-ago period. This was just shy of the average analyst net revenue prediction of $13.6 billion. Despite this narrow net revenue miss, AbbVie has beaten analysts' net revenue consensus in eight out of the past 10 quarters.
The company's top-selling drug Humira (used to treat various autoimmune conditions) experienced a 2.7% year-over-year decline in net revenue to $4.7 billion in the first quarter. The drug's U.S. net revenue ticked 2.2% higher over the year-ago period to $4 billion ahead of its 2023 patent expiration. But this was more than offset by a 22.6% year-over-year drop in international net revenue for the drug to $743 million. Humira's dip in international net revenue was the result of continued biosimilar competition in key markets like the European Union.
The good news is that AbbVie's next-generation immunology drugs Skyrizi and Rinvoq generated more than enough net revenue to offset Humira. Market share gains in the psoriasis market and the recent launch in psoriatic arthritis pushed Skyrizi's net revenue 63.7% higher over the year-ago period to $940 million. Additional indications also led Rinvoq's net revenue to surge 53.6% higher to $465 million in the first quarter.
AbbVie posted $3.16 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, which was 9.3% higher than the year-ago period. This exceeded the average analyst earnings estimate of $3.15. How did AbbVie surpass the analyst earnings consensus for all 10 of the last 10 quarters?
Aside from a higher net revenue base, this was driven by two factors. AbbVie's non-GAAP net margin expanded by 210 basis points year-over-year to 47.4% in the first quarter. This was only partially offset by a 0.2% increase in the company's weighted-average diluted outstanding share count to 1.8 billion for the quarter.
Once Humira's U.S. patent expires in 2023, AbbVie will face a temporary decline in its net revenue and adjusted diluted EPS. But thanks to the company's pipeline of 60 compounds in clinical development, analysts expect that AbbVie will deliver 2.1% annual earnings growth over the next five years. And given the company's track record of beating earnings expectations, that growth forecast is arguably quite conservative.
Image source: Getty Images.
2. A well-covered dividend
AbbVie also offers a market-trouncing 3.9% dividend yield for income investors, which is more than double the S&P 500 index's 1.5% yield.
Better yet, it's expected that the stock's dividend payout ratio will be 40% in 2022. This gives AbbVie plenty of capital possibly to complete acquisitions that could help it recover from Humira's patent expiration as well as potentially pay down debt and repurchase shares.
That's why I believe that the stock will hand out 6% annual dividend increases to shareholders over the next several years. This makes AbbVie a good combo of immediate income and future income.
3. A reasonably valued stock
Finally, valuation is the cherry on top that makes the stock a buy. AbbVie's forward price-to-earnings (P/E) ratio of 12.3 is just above the drug manufacturer industry average of 11.5. The stock's quality arguably justifies a slight premium over its industry.
And AbbVie's trailing 12-month price-to-free-cash-flow (P/FCF) ratio of 11.7 is a bit lower than its 10-year median of 13. This discrepancy between the current and historic P/FCF ratio seems to provide a big enough cushion to price in the risk of Humira's looming U.S. patent expiration.
