If you're a regular StreetAuthority reader, then you may have heard of the "Dividend
Decade." If you haven't, then it's a prediction that in the 10 years, the broader market will be absolutely flat
. Instead, dividends will account for all
of the market's total return.
This means companies that steadily raise dividends will outperform the overall market in the next decade. And one of my favorite stocks that could benefit from this trend just went through a major change, making it an even sweeter deal.
Health care giant Abbott Laboratories (NYSE: ABT) celebrated the New Year by splitting itself in two. The legacy pharmaceutical business, which was renamed Abbvie (NYSE: ABBV), will focus on breakthrough drug therapies. The company's diagnostic tests, medical devices, nutritional products and branded generic pharmaceutical operations were combined into a second business that retains the Abbott name. Abbott structured the breakup as a tax-free distribution to shareholders, with investors receiving one Abbvie share for every Abbott share they held.
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Abbott made a brilliant move by spinning off its pharmaceutical business. Humira, its top-selling drug, accounts for more than half this segment's business, and its patent expires in 2017. Spinning off this segment frees the rest of the company from its risks.
Abbvie will pay a rich $1.60 annual dividend, which at the current $35 share price, provides a hefty 4.6% yield. Equally important, Abbvie is already showing many of the characteristics of a high-quality dividend stock. Abbvie generates plenty of earnings and cash flow, has a cash-rich balance sheet and a hugely valuable asset in its blockbuster drug Humira.
The top-selling drug is used to treat rheumatoid arthritis, psoriasis, Crohn's disease and other common auto-immune disorders. Sales of the drug have doubled in the past four years. Humira is expected to earn $10 billion in revenue this year and accounts for roughly half of Abbvie's total sales.
There is risk associated with Abbvie's loss of patent protection on Humira three years from now, but analysts don't anticipate sales will decline for several reasons. First, Humira belongs to a class of drugs (biologics) that is extremely difficult to manufacture. This will likely limit competition from generics. Second, because of Humira's proven track record and dominant share in the market for rheumatoid arthritis drugs, physicians will probably continue to utilize Humira as a first-line treatment even after generic versions are launched. Third, overall sales of auto-immune drugs are projected to grow 6% a year to reach about $48 billion by 2015. Humira has already been approved as a treatment for nine different illnesses and Abbvie has four more indications in late-stage clinical trials that should help drive future sales growth. For these reasons, analysts say Humira sales will likely continue to rise and peak at more than $12 billion by 2017.
Abbvie also owns other category winners. These include a leading testosterone replacement therapy drug, a hormonal therapy for thyroid disease and two of the top-selling antiviral medicines for HIV.
Of course, when all is said and done, any pharmaceutical company is only as good as its drug discovery pipeline. But AbbVie has made impressive progress in recent years through internal drug development, and licensing and collaboration deals. The company is considered second only to Gilead Sciences (Nasdaq: GILD) in the strength of its hepatitis C drug franchise. Both companies are developing new oral treatments for hepatitis C, a deadly disorder that infects 180 million individuals worldwide.
Beginning in 2015, Abbvie expects to begin launching four major new drugs in rapid succession, each of which is estimated to be worth $4 to $6 billion in peak sales. In all, the company has a total of 20 new drugs in mid- to late-stage development.
In addition to a flourishing new-drug pipeline, Abbvie has a global footprint that few new-drug companies can match. The company has commercial operations worldwide and sales in more than 150 countries. Abbvie plans to leverage this global presence in the next several years and is targeting nearly $1 billion in new sales from developing markets.
The stock split happened in early January, so Abbvie won't be reporting sales and earnings as a stand-alone company until the first quarter is completed. However, the past performance of Abbott's proprietary pharmaceuticals business provides a framework for what Abbvie investors can expect. During the first nine months of 2012, sales of proprietary pharmaceuticals improved 7% to $12.9 billion, fueled by a 29% jump in Androgel sales and a 19% increase in Humira sales. Operating income for this business rose 13% to $5.6 billion and profit margins were generous even by pharmaceutical industry standards at 43%. Analysts predict Abbvie will likely generate sales of $18 billion next year and 2013 earnings per share estimates range from $3.03 to $3.17.
This stock has $7.2 billion of cash and an investment-grade credit rating. The company is also a cash machine that generates roughly $6 billion of cash flow a year, which will more than twice covers the $2.5 billion annual dividend payment. Management targets 50% payout of cash earnings for the dividend on an ongoing basis and is strongly committed to dividend growth.
Old Abbott had a stellar track record, increasing dividends 40 years in a row, including a 6% dividend increase just prior to the breakup to an annualized rate of $2.16 a share. Abbott divided the dividend amount between the two companies when they split. As stated before, Abbvie plans to pay a $1.60 annual dividend currently yielding 4.6%, while Abbott will pay a 56-cent annual dividend that yields 0.9%.
Risks to Consider: Many new drugs never reach the market and there is no guarantee that Abbvie's pipeline will deliver future revenue and profits. However, this risk is mitigated by the fact that half of Abbvie's pipeline products are in late-stage development when risks are smaller. Also, in connection with the breakup, Abbvie raised $14.7 billion of debt, which was used to make an $8.5 billion cash payment to Abbott. However, with cash flow from operations close to $6 billion annually and no major debt maturities before 2015, Abbvie shouldn't have any problem servicing its debt.
Action to Take --> By purchasing Abbvie shares now, investors can collect a 4.6% dividend while they wait for new drugs to launch beginning in 2015, which should fuel earnings growth as well as share price gains.
Lisa Springer does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article