AbbVie (NYSE: ABBV) has long been a darling of dividend growth investors, and for good reason. Since its spinoff from Abbott Laboratories in 2013, the pharmaceutical titan has been a dividend growth machine, boosting its payout by an eye-popping average of 13.4% annually over its first decade.
But now AbbVie faces its biggest test yet. Humira, the immunology juggernaut that once generated about half of the company's revenue, lost U.S. patent protection in 2023. As biosimilar competition erodes Humira's market share, AbbVie's dividend growth rate has slowed considerably.
Can AbbVie overcome the Humira patent cliff and reclaim its status as an elite dividend growth stock? Let's dive into the numbers and recent developments to see if this pharmaceutical giant has what it takes to return to double-digit dividend growth.
Dividend growth has slowed, but the yield remains attractive
AbbVie's dividend growth has slowed considerably in recent years. The company's three-year dividend growth rate stands at 3.2%, a significant decrease from its 10-year rate of 10.5%. This slowdown reflects the challenges posed by Humira's patent expiration and increased competition from biosimilars.
Despite the slowdown, AbbVie's current dividend yield of 3.19% remains attractive. This yield slightly exceeds the average of 3.12% among its big pharma and blue-chip biotech peers. The company's five-year dividend growth rate of 6.1% compares favorably with its peer average of 4.45%, underscoring AbbVie's historical commitment to sizable and regular dividend increases.
Financial health raises concerns
AbbVie's balance sheet and dividend metrics paint a concerning picture of dividend sustainability. The company's debt-to-equity ratio stands at a steep 10.4, indicating a highly leveraged financial position. This level of debt could constrain AbbVie's financial flexibility and potentially hamper future dividend growth.
Even more alarming is AbbVie's payout ratio of 216.7%, far surpassing the peer average of 141%. This sky-high figure means AbbVie is currently paying out more than twice its earnings in dividends, a practice that's unsustainable in the long run.
Historically, companies with payout ratios exceeding 75% have been at higher risk of dividend cuts or suspensions. However, AbbVie's lengthy 52-year streak of consecutive dividend increases, stemming from its prior association with Abbott Laboratories, implies that a reduction is unlikely in the near term.
Nonetheless, dividend investors should monitor these financial health indicators, as they could signal trouble for future dividend growth.
Immunology franchise shows strength
While AbbVie faces challenges with Humira's patent expiration, its next-generation immunology drugs are performing exceptionally well. Skyrizi and Rinvoq are demonstrating robust growth, with operational increases in net revenue of 45.6% and 59.2%, respectively, in the most recent quarter. These drugs are effectively offsetting the decline in Humira sales, which decreased by 29% globally in the same period.
The strong performance of Skyrizi and Rinvoq suggests that AbbVie has viable successors to Humira in its portfolio. Management has stated that these two drugs should deliver around $27 billion in combined sales in 2027. If achieved, this sales target would provide a solid foundation for future revenue growth and provide critical support for its dividend program during this challenging period.
Strategic acquisitions boost the drugmaker's outlook
AbbVie's recent acquisitions highlight its commitment to long-term growth. The recent $8.7 billion acquisition of Cerevel Therapeutics strengthens AbbVie's neuroscience pipeline with multiple clinical-stage and preclinical candidates targeting schizophrenia, Parkinson's disease, and mood disorders.
Moreover, the acquisition of cancer specialist ImmunoGen accelerates AbbVie's entry into the solid tumor space and adds Elahere, a first-in-class antibody-drug conjugate approved for platinum-resistant ovarian cancer. These strategic moves diversify AbbVie's portfolio and could significantly boost earnings power in the latter half of the decade.
Wall Street adopts a cautious stance
Wall Street's valuation of this immunology titan suggests a mix of caution and potential opportunity. AbbVie's shares currently trade at 14.2 times 2026 projected earnings, a modest discount to the blue-chip biotech peer average of around 15 times 2026 forward earnings.
This conservative valuation indicates the market isn't fully sold on AbbVie's post-Humira growth strategy. The stock appears to be in "prove it" mode, with investors waiting to see how well the company navigates the Humira patent cliff.
For contrarian investors, this cautious market sentiment could represent an attractive entry point, provided AbbVie can continue to successfully execute its post-Humira strategy.
Can AbbVie return to form as a top dividend growth play?
AbbVie's dividend growth has undoubtedly slowed, and its financial metrics raise valid concerns. However, the company's robust pipeline and strategic acquisitions provide compelling reasons for optimism. The impressive performance of Skyrizi and Rinvoq in offsetting Humira's decline showcases AbbVie's innovative prowess and ability to create long-term shareholder value.
While uncertainty lingers, AbbVie seems well positioned to potentially return to double-digit dividend growth within the next two years. This promising outlook speaks volumes about management's adept handling of one of the industry's most closely watched patent expirations.
The bottom line is the drugmaker has the pieces to overcome these challenges and reestablish itself as a premier dividend growth stock. So despite the recent dropoff in dividend growth, savvy investors with a long-term outlook may want to use this period of weakness to build a position in the dividend powerhouse.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Can AbbVie Regain Its Status As a Top Dividend Growth Stock? was originally published by The Motley Fool