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Why You Should Buy ABBV Stock for Income and Value

Tezcan Gecgil

Today, I’d like to discuss the outlook for AbbVie (NYSE:ABBV), the $116-billion-market-cap biopharmaceutical stock, whose shares have been in a downtrend for almost a year and have especially been hammered following its earning report of Jan. 25.

Why You Should Buy ABBV Stock for Income and Value

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There could be further price volatility and weakness in the ABBV stock price in the coming weeks, pushing it toward the low-$70’s or even mid-$60’s level. However, it is a company with robust growth prospects and respectable dividends that may deserve a place in a diversified portfolio.

Therefore, if you already own AbbVie shares, you might want to hold your position. That said, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5-7% below the current price point. Expect nearer-term trading to be choppy at best.

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If you are an experienced investor in the options market, you may want to protect your portfolio with a covered call or possibly a put option spread with a 3-month time horizon. If you do not yet hold ABBV, you may want to wait several weeks to buy into the stock at the next dip.

With all of that in mind, here’s a deeper look into at AbbVie stock.

A Hiccup in the Robust Fundamental Story

In 2013, Abbott Laboratories (NYSE:ABT) spun off its research-based pharmaceuticals business, creating AbbVie, an independent biopharmaceutical company. Abbott decided to retain the branded generic pharmaceuticals, diagnostics, medical devices and nutrition.

Meanwhile, AbbVie took control of the development and commercialization of a range of brands, including Humira, its flagship drug used to treat autoimmune diseases, Imbruvica, which differentiates between cancer cells and regular cells, and Synthroid, a replacement for a hormone normally produced by the thyroid gland.

The company’s financials and growth metrics over the past five years have been impressive and ABBV was in a strong financial position heading into 2019, with hopes of a higher share price during the first quarter.

However, in January, AbbVie’s fourth-quarter earnings release weighed heavily on the stock. For starters, the company missed the consensus on revenue. Its earnings per share of $1.90 was below the expected number of $1.94. The next day, the stock fell by 6% and that decline has intensified over the past two months.

ABBV’s quarterly report also showed that the international sales of Humira fell by almost 15% year over year, mostly as a result of ‘biosimilar’ competition in Europe, which makes up three-quarters of the overseas Humira business. In October 2018, its patent in the European Union (E.U) expired.

The U.S. Food and Drug Administration (FDA) refers to biosimilars as “highly similar to an FDA-approved biological product … [that has] no clinically meaningful differences in terms of safety and effectiveness.” Although Wall Street had already known about this sales decline in Europe, when coupled with the other question marks in the earnings report, it was enough to increase the selling pressure on the stock.

It is also possible that investors got worried about the potential fall in Humira revenue when the drug comes off patent in 2023 in the U.S. It is important to emphasize that AbbVie’s revenue from the drug will not decline to nothing when the biosimilars hit the market in 2023. What will most likely happen is that as the company’s pricing power decreases, the revenue will also gradually decline.

Therefore, many analysts feel that ABBV shares offer value and that any bad news that is specific to Humira is already baked into the stock price.

Value Play

When markets penalize biopharma stocks, it can take some time for them to recover.  However, for patient long-term investors, the returns can be significant — especially when the company boasts several other current drugs, as well promising ones in the pipeline.

At present, AbbVie’s other major products include:

  • AndroGel, a testosterone replacement therapy.
  • Creon, a pancreatic enzyme therapy to treat exocrine pancreatic insufficiency.
  • Duopa and Duodopa, gels to treat Parkinson’s disease.
  • Viekira Pak, which treats chronic hepatitis C.
  • Zinbryta, to treat multiple sclerosis.

Analysts are also expecting a slew of new products in 2020, such as next-generation immunology drugs.  These drugs and others that are being developed and commercialized, highlight how impressive the potential growth story could be in the next few years.

ABBV trades at a trailing price-to-earnings (P/E) ratio of 21.  This number is rather modest when compared with the P/E ratios of  several competitors, including AstraZeneca (NYSE:AZN) with a P/E of 49.9, Pfizer (NYSE:PFE) with a P/E of 25.2, and Merck (NYSE:MRK) with a P/E of 34.8.

Reinvesting the Sweet Dividend Yield of ABBV stock

Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. AbbVie also offers investors a healthy dividend yield of about 5.4%, another reason why I believe the stock belongs in a capital-growth portfolio.

Since its spin-off from Abbott Laboratories in 2013, ABBV has increased dividends every year — a trend that is likely to continue. The next dividend payment is scheduled for May 15, 2019, with an ex-dividend date of April 12.

It would not be wrong to call AbbVie a cashflow machine; as of Dec. 31, the company had a free cash flow of $3.27 billion. This strength not only gives shareholders conviction that the dividends are safe, but also provides the company with enough flexibility to, for example, make acquisitions to offset any further Humira revenue decline (especially in the U.S. when the drug comes off patent in 2023).

The Bottom Line on AbbVie Stock

Like most biopharma stocks, AbbVie is a high-momentum stock. In other words, when the broader markets go up or when the company’s earnings beat expectations, both investors and momentum traders tend to hit the “buy” button fast, expecting superior gains within days or weeks.

However, if markets suffer a decline or if the company cannot keep up with the rising expectations, investors’ risk appetite decreases fast and these stocks can fall much harder than less volatile stocks.

The market has punished Abbvie stock since the start of the year. The stock may continue to struggle through much of 2019. However, patient ABBV bulls will probably be proven right to believe in the management’s commitment to create shareholder value and to further grow the company both organically and through acquisitions. In the meantime, they can continue to collect high dividends.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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