The pharmaceutical industry is ripe for the picking for income investors. That's because the industry enjoys particularly high profit margins, which can fund generous dividends. But as is the case with anything good, there are still risks.
In pharmaceuticals, the biggest risk is the patent expiration of top-performing drugs. This is why it is crucial to pick pharmaceutical companies with deep product pipelines to keep revenue moving higher.
AbbVie (ABBV 0.25%) appears to fit this profile. Here's why yield-hungry investors should consider buying the Dividend King with a track record of 51 consecutive years of dividend hikes.
Net revenue and earnings keep moving higher
With products marketed in more than 175 countries and treating over 62 million patients each year, AbbVie is one of the most impactful drugmakers on the planet. The company's medicines help treat more than 60 conditions that collectively affect people at any stage of life.
AbbVie recorded $15.1 billion in net revenue during the fourth quarter ended Dec. 31, which was up 1.8% over the year-ago period. Accounting for a 2% unfavorable foreign currency translation headwind resulting from a strong U.S. dollar, the company's net revenue would have been 3.8% higher for the quarter.
This solid net revenue growth was fueled by AbbVie's stacked drug portfolio, which included Humira and Skyrizi, two mega-blockbuster drugs (at least $5 billion in annualized net revenue). The former lost its exclusivity in a U.S. just a few weeks ago. This opens up $18.6 billion of U.S. Humira revenue to competition from biosimilar drugs from the likes of Amgen and Pfizer.
While this will lead to billions in lost annual revenue for the drug franchise this year and beyond, Skyrizi along with AbbVie's other next-gen immunology drug, Rinvoq, are expected to more than offset this patent expiration moving forward. That's because the additional indications for the two drugs has AbbVie confident that combined annual revenue will exceed peak annual Humira revenue of $21 billion by 2027. That would be nearly triple the $7.7 billion in combined revenue that Skyrizi and Rinvoq posted in 2022.
Abbvie's portfolio also contained 10 blockbuster medicines (at least $1 billion in annualized net revenue), such as the antipsychotic called Vraylar and Botox Cosmetic. Net revenue growth ranged from the low-single-digits to the high-double-digits in eight of these 12 drugs. The other four products experienced mid-single-digit to low-double-digit declines in net revenue.
AbbVie's non-GAAP (adjusted) diluted earnings per share (EPS) surged 16.9% higher year over year to $3.60 in the fourth quarter. Careful cost management (operating expenses declined 2%) helped AbbVie's non-GAAP net margin expand by 540 basis points over the year-ago period to 42.5% during the quarter. This explains how the company's adjusted diluted EPS growth outpaced net revenue growth for the quarter.
With nearly 100 compounds in different stages of clinical development within its pipeline, AbbVie is well prepared to offset the dip in Humira revenue with future product launches.
Image source: Getty Images.
A safe, market-crushing dividend
AbbVie's 4% dividend yield is considerably higher than the S&P 500 index's 1.7% yield. Yet, income investors can bank on the dependability of this high yield.
That's because even with reduced profits projected for this year due to Humira's battle against biosimilars, the dividend payout ratio will clock in a tad above 53%. While this is a higher than usual payout ratio for AbbVie, it's still manageable enough to leave the company with the capital needed to complete acquisitions and repay debt.
This is why I expect mid- to high-single-digit annual dividend growth to resume in 2025 and beyond. In the meantime, investors get paid handsomely to settle for token payout increases as AbbVie stabilizes its business.
The blue-chip stock is trading at a discount
The broader markets have edged higher so far in 2023. But shares of AbbVie have shed 6% of their value so far this year. This has pushed the stock's forward price-to-earnings ratio down to just 13.4. For context, that is below the drug manufacturer industry average of 14. Given AbbVie's reputation as a Dividend King, this lowly valuation arguably presents a buying opportunity for income-oriented investors.
