Will AbbVie regain its status as a leading dividend stock?

AbbVie (ABBV 0.10%) has long been a favorite of dividend investors, and for good reason. Since its spin-off from Abbott Laboratories In 2013, the pharmaceutical giant became a dividend growth machine, increasing its payout by an average of 13.4% per year over the first decade.

But now AbbVie faces its biggest challenge yet. Humira, the immunology powerhouse that once accounted for about half of the company’s revenue, is set to lose U.S. patent protection in 2023. As competition from biosimilars erodes Humira’s market share, AbbVie’s dividend growth has slowed significantly.

Can AbbVie overcome the Humira patent chasm and regain its status as an elite dividend stock? Let’s look at the numbers and recent events to see if this pharmaceutical giant has what it takes to return to double-digit dividend growth.

Dividend growth slows, but yields remain attractive

AbbVie’s dividend growth has slowed significantly in recent years. The company’s three-year dividend growth rate is 3.2%, down significantly from the 10-year rate of 10.5%. This slowdown reflects challenges related to the Humira patent expiration and increased competition from biosimilars.

ABBV dividend growth data (annual) by YCharts

Despite the slowdown, AbbVie’s current dividend yield of 3.19% remains attractive. This yield is slightly above the 3.12% average among its large pharma and blue-chip biotech peers. The company’s five-year dividend growth rate of 6.1% compares favorably with the 4.45% average among its peers, underscoring AbbVie’s historical commitment to significant and consistent dividend increases.

Financial health is a concern

AbbVie’s balance sheet and dividend metrics paint a troubling picture of dividend sustainability. The company’s debt-to-equity ratio is a steep 10.4, indicating a highly leveraged financial position. This level of debt could limit AbbVie’s financial flexibility and potentially hinder future dividend growth.

Even more alarming is AbbVie’s dividend payout ratio of 216.7%, well above the industry average of 141%. This inflated figure means that AbbVie is currently paying out dividends that are twice its earnings, which is unsustainable over the long term.

Historically, companies with payout ratios above 75% have been more likely to see their dividends cut or suspended. However, AbbVie’s long, 52-year streak of consecutive dividend increases, stemming from its previous relationship with Abbott Laboratories, suggests that a cut is unlikely in the near future.

However, dividend investors should monitor these financial health metrics as they may signal problems with future dividend growth.

Immunity franchise shows strength

While AbbVie faces challenges related to Humira’s patent expiration, its next-generation immunology drugs are performing exceptionally well. Skyrizi and Rinvoq are showing solid growth, with net operating revenues up 45.6% and 59.2%, respectively, in the latest quarter. These drugs effectively offset the decline in Humira sales, which fell 29% globally during the same period.

Strong performances from Skyrizi and Rinvoq suggest that AbbVie has viable successors to Humira in its pipeline. Management said the two drugs should generate combined sales of about $27 billion in 2027. If achieved, this sales target would provide a solid foundation for future revenue growth and provide key support for the dividend program during this challenging period.

Strategic acquisitions boost drugmaker’s prospects

AbbVie’s recent acquisitions underscore its commitment to long-term growth. The recent acquisition of Cerevel Therapeutics for $8.7 billion strengthens AbbVie’s neuroscience capabilities with multiple clinical and preclinical candidates targeting schizophrenia, Parkinson’s disease and mood disorders.

In addition, the acquisition of cancer specialist ImmunoGen accelerates AbbVie’s entry into solid tumors and adds Elahere, a first-in-class antibody-drug conjugate approved for the treatment of platinum-resistant ovarian cancer. These strategic moves diversify AbbVie’s portfolio and could significantly increase earnings power in the second half of the decade.

Wall Street takes a cautious stance

Wall Street’s valuation of the immunology titan suggests a mix of caution and potential opportunity. AbbVie shares are currently trading at 14.2 times projected 2026 earnings, a slight discount to its blue-chip biotech peers’ average of about 15 times forward 2026 earnings.

This conservative valuation indicates that the market is not fully convinced of AbbVie’s growth strategy after Humira. The stock seems to be in “prove it” mode, with investors waiting to see how well the company will handle the Humira patent.

For investors with a different view, the cautious market stance could prove to be an attractive entry point, provided AbbVie continues to successfully execute its strategy following the withdrawal of Humira.

Can AbbVie regain its dividend growth leadership?

AbbVie’s dividend growth has undoubtedly slowed, and its financial metrics raise concerns. However, the company’s solid pipeline and strategic acquisitions provide compelling reasons for optimism. The impressive performance of Skyrizi and Rinvoq in offsetting the decline of Humira demonstrates AbbVie’s innovative prowess and ability to create long-term shareholder value.

While uncertainty persists, AbbVie appears well-positioned to potentially return to double-digit dividend growth over the next two years. This promising outlook speaks volumes about management’s skillful handling of one of the most closely watched patent expirations in the industry.

In short, the drugmaker has the pieces to overcome these challenges and re-establish itself as a top dividend stock. So despite the recent dip in dividend growth, savvy investors with a long-term perspective may want to use this period of weakness to build a position in the dividend powerhouse.