How do you know when a former favorite dividend stock is no longer one you should buy, or hold? Some would say it's time to look away as soon as the profits the company uses to make dividend payments begin shrinking.
AbbVie (ABBV -4.58%) shares offer an above-average dividend yield of 4% at recent prices, but some cautious investors were turned off by earnings that fell by 58% to $2.3 billion in the first half of the year.
In January, Humira, AbbVie's top-selling drug, lost patent-protected market exclusivity in the United States. But the good news for investors is that this is a big company with lots of moving pieces. Here's a look at the pieces that are moving in the right direction. Let's see if they can offset Humira's losses and help AbbVie continue a legendary streak of dividend raises.
Dividends hardly get more reliable than this
Abbott Laboratories spun out its pharmaceutical operation as AbbVie back in 2013. Abbott hasn't missed a quarterly dividend payment in nearly 100 years, and it's raised its payout every year since 1973.
AbbVie kept up with the streak of annual increases and stepped on the gas. The drugmaker's payout has risen an outstanding 270% over the past decade.
Lucrative drug sales allowed AbbVie's operation to generate a whopping $23.5 billion in free cash flow over the past 12 months. The company needed just 43% of that amount to meet its dividend commitment. That suggests earnings can fall much further before investors need to worry about a reduced dividend.
Image source: Getty Images.
Managing the decline
Global Humira sales peaked at $21.2 billion last year, and $18.6 billion of that came from the U.S. market. Now that
Several lower-cost biosimilar versions, such as Amjevita from Amgen, are available in the U.S. market, global Humira sales fell to an annualized $16 billion during the second quarter.
This year, AbbVie expects about $53.4 billion in total revenue, which would be a decrease of just 8% from last year. The company is managing Humira's decline with rapidly rising sales of a few more recently launched drugs. Rinvoq is an arthritis treatment that launched in 2019, and it's already generating $3.7 billion in annualized sales. Skyrizi for psoriasis is about the same age as Rinvoq, and it reached an annualized run rate of $7.5 billion in the second quarter.
Earlier this year, AbbVie said it expected combined sales of Skyrizi and Rinvoq to exceed peak Humira sales by 2027. The pace they're on, though, suggests the company will beat its own timeline, and these are hardly its only growth drivers.
Vraylar, a schizophrenia treatment first approved in 2015, became a new option last December for millions of Americans with major depressive disorder. Now, AbbVie thinks Vraylar can generate an additional $2.5 billion in annual revenue at its peak.
In May, AbbVie and its collaboration partner, Genmab, received approval from the U.S. Food and Drug Administration for a new lymphoma treatment called Epkinly. This new injectable treatment is expected to generate sales of around $3 billion annually at its peak.
Still a buy
Replacing shrinking Humira revenue will be a big challenge for AbbVie, but it looks as if Skyrizi and Rinvoq are up to the task. With additional growth drivers like Epkinly and Vraylar pushing the company's needle, AbbVie should have no problem raising its dividend payout at a pace that exceeds inflation over the long run. Adding some shares to an income-generating portfolio looks like the smart move to make right now.
