AbbVie, Abbott Spinoff, Starts Life Near Top of Pharma Industry’s Dividend-Yield Heap

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Congratulations: If you held shares in AbbVie (ABBV) on Tuesday, you'll be getting 40 cents for each of them in about a month. If you don't, there's still time to sign on for next quarter's dividend — which, at $1.60 a year and a 4.6% dividend yield, is one of the best on offer in the pharmaceutical industry.

Only GlaxoSmithKline (GSK) offers a better dividend yield in that crowd, at about 5.2%, and AbbVie's yield puts it in the company of such well-known dividend payers as Duke Energy (DUK), at a 4.6% dividend yield and Verizon (VZ), at 4.9%. Other major pharmaceutical companies offer no more than 4.1%, at Bristol-Myers Squibb (BMY), to as little as 1.7%, for Abbott Labs (ABT).

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AbbVie, of course, is the newly hatched offspring of Abbott Labs, spun off on Jan. 2; it announced the inaugural dividend two days later. That means there isn't much history to draw on when deciding how attractive that dividend really is.

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There is this, though: Added up across all 1.6 billion AbbVie shares, that dividend should cost just under $2.6 billion. We figure that works out to an estimated payout ratio of 0.51 -- in other words, a little over half of AbbVie's net income is likely to go to paying its dividend this year. (We're assuming its reported Sept. 30 results, at net income of $3.74 billion, will amount to roughly three-quarters of the company's full-year profit.)

By all accounts, AbbVie is a strong cash generator. Abbott sent it into the world with it a portfolio of established drugs that includes Humira, a blockbuster drug for rheumatoid arthritis, psoriasis and Crohn's disease. Humira also provides nearly half of AbbVie's sales (and more of its profits): $6.59 billion of $13.2 billion in total sales in the nine months ended Sept. 30.

The bottom line: AbbVie seems to be promising to funnel much of its profits from Humira to shareholders in the form of dividends. That would leave the rest of its portfolio to fund growth.

But the rest of the fledgling company's business currently comes from a collection of less notable drugs, some of which lose patent protection starting this year, including three cardiovascular drugs that make up roughly 12% of AbbVie's total sales. Morningstar pharma analyst Damien Conover estimates that AbbVie will lose nearly $2 billion in sales over the next couple years from those three drugs. (Humira could face generic competition starting in 2017, but Conover and other analysts think they won't capture much market share initially. Recreating biologics such as Humira is more difficult and costly than making a generic of a chemical compound.)

Should some of the drugs in AbbVie's pipeline take off — and analysts like the prospects of its Hepatitis C drugs, likely to launch starting in 2015 — the dividend coverage would remain just fine.

But absent some hefty pipeline successes or smart acquisitions, AbbVie's tidy dividend, in hindsight, would look more like a warning than an enticement.

Theo Francis, a contributing editor at YCharts, has specialized in digging into corporate disclosures, including for The Wall Street Journal, BusinessWeek, Bloomberg News and footnoted.com. He currently runs Disclosure Matters, an independent research and training firm in Washington, D.C. He can be reached at editor@ycharts.com.


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