AbbVie (ABBV -0.30%) and Viatris (VTRS -0.69%) have a lot more in common than first glances would suggest. The two were both spun off from larger companies and now deliver above-average dividend yields.
As pharmaceutical companies, they provide the potential for steady growth and income that many investors seek. Each company has its own impending hurdle that may be depressing the price of its shares. In AbbVie's case, it is the patent cliff next year for its immunology drug Humira, the top-selling drug last year other than COVID-19 vaccines.
In Viatris' case, the concern is a little more nebulous. What, exactly, is the company going to be? When it first spun off as a combination of the UpJohn division from Pfizer and Mylan, it appeared to be a maker of generic drugs. Now, the company is looking to streamline its business with an eye toward more novel and profitable therapies.
In the long term, which is going to be the better dividend stock?
VTRS Financial Debt to Equity (Quarterly) data by YCharts
The case for AbbVie
AbbVie stock is up more than 18% so far this year, showing strength even amid supply chain, labor, and inflation concerns.
Everyone already knows that the company is facing a decline in revenue when biosimilar competition for Humira takes hold next year in the United States. But by now, that concern is already baked into the stock's price. Management has been optimistic that the company's newer immunology drugs, Skyrizi and Rinvoq, will eventually make up for Humira's declining sales.
In the meantime, it's important to realize the patent cliff isn't that steep as one might think.
Humira has faced biosimilar competition in Europe for four years; yet, in the third quarter, international sales were down only 25.9% over the same period last year and down 38.5% from the third quarter of 2018, the last quarter before the drug faced biosimilar competition overseas.
Humira's sales will likely taper off, and some of that dropoff will be due to in-house cannibalization as Rinvoq and Skyrizi add indications.
In the third quarter, Humira brought in $4.96 billion overall, and together Skyrizi and Rinvoq were responsible for $2.09 billion , with Skyrizi's sales up 75.4% year over year and Rinvoq's sales up 53.5% over the same period last year.
AbbVie is raising its dividend by 5% next year to $1.48 per share, the 51st consecutive year the company has raised its dividend (counting its time as part of Abbott Laboratories) and making it a Dividend King. Since AbbVie's spinoff in 2013, it has boosted its dividend by 270%. Its current yield of 3.7% is slightly more than double the S&P 500 average of 1.82%, and its payout ratio of 45% leaves plenty of room for continued growth.
The case for Viatris
Viatris' shares are down more than 19% this year. The company is in the process of shedding itself of key assets, including its biosimilars, women's health division, and its over-the-counter drugs -- and has said that other assets will be sold off as well.
In its place, the company is adding an ophthalmology franchise through the acquisitions of Oyster Point Pharma and Famy Life Sciences. The deal, announced Nov. 7, is worth $700 million to $750 million and is expected to close in the first quarter of 2023, the company said, adding that it sees the acquisitions adding at least $1 billion in sales by 2028.
With the $9 billion-plus from its divestitures, it makes sense that Viatris will look to add other profitable areas, but it isn't saying exactly what those will be yet. However, in February, Viatris CEO Michael Goettler said the company is looking at opportunities in ophthalmology, dermatology, and gastrointestinal therapies. And with its deal this month, it has already begun working on the first of those three. He also said the company is looking to maximize shareholder value, which speaks well to future dividend increases.
Viatris is profitable, but it is looking for more growth. In the third quarter, it reported revenue of $4.07 billion, down 10% year over year, but net income of $354.3 million, up 14% over the same period last year.
The company has a relatively high debt-to-equity ratio of nearly two, but it has said it is in the process of paying down its debt. Its other financial goals include a compound annual growth rate of 3% for revenue and a mid-teens rate for adjusted earnings per share between 2024 and 2028.
Counting its time as part of Pfizer, it has raised its dividend for 13 consecutive years. Since its spinoff in November 2020, it has raised its dividend once, by 9%, to $0.12 per share. Its current yield is 4.4%, and its payout ratio is very safe at 20%.
Neither is a sure thing, but...
Considering the changes surrounding Viatris' business plan, it's hard to tell what the company will look like in a few years. It may have a higher yield on its dividend and more potential growth, but AbbVie has a longer history of growing its dividend, and its plan going forward is easier to understand.
Viatris has the right idea by trimming its less-profitable operations and paying down its debt. That said, there are just too many unknowns going forward as it pivots for the stock to be a better divided pick for income investors, who tend to be more risk averse. AbbVie has its own issues with the decline of Humira on the horizon, but at least it's easier to see its path going forward.
