Company Description: Abbvie Inc. is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
ABBV is trading at a premium to all four valuations above. Since ABBV's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 58.0% premium to its calculated fair value of $32.41. ABBV did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
ABBV earned one Star in this section for 3.) above. ABBV earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 41 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $452 is below the $500 target I look for in a stock that has increased dividends as long as ABBV has. If ABBV grows its dividend at 5.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.68%. ABBV earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Memberships and Peers: ABBV is a member of the S&P 500 a Dividend Aristocrat. The company's peer group includes: Merck & Co. Inc. (MRK) with a 3.2% yield, Bristol-Myers Squibb Company (BMY) with a 2.7% yield, and Eli Lilly & Co. (LLY) with a 3.3% yield.
Conclusion: ABBV did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks ABBV as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $49.87 before ABBV's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 41 years of consecutive dividend increases. At that price the stock would yield 3.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.3%. This dividend growth rate is above the 5.0% used in this analysis, thus providing no margin of safety. ABBV has a risk rating of 1.75 which classifies it as a Medium risk stock.
Like all pharmaceutical companies, ABBV is faced with competition from generics, pricing restraints and R&D related risks. The company owns the best-in-class immunology drug Humira -- which accounts for about 50% of its sales. Humira's U.S. patent expires in late 2016. With Humira, the company is well-positioned to produce strong cash flows to support future development of drugs in the pipeline including new treatments for hepatitis C, cancer and other conditions.
ABBV's 2014 will likely be challenging as the company absorbs the impact of the loss of exclusivity on the lipid franchise (TriCor, TriLipix and Niaspan). The company announced that it has completed its phase III HCV (Hepatitis C compound) studies. The study showed positive results with cure rates of 92% after 12 weeks and 96% after 24 weeks. The high rates of response and tolerability along with low discontinuation rates are encouraging. ABBV remains on track to file for its HCV treatment early in the second quarter of 2014.
The stock's dividend metrics continue to deteriorate. Its Free Cash Flow payout of 280% (up from the last review of 267%) and Debt To total Capital of 71% (down from 81%) are well beyond my maximum acceptable level. In addition, ABBV is currently trading well above my calculated fair value of $32.41, as such, I will not be adding to my position at this time.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long ABBV (4.2% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [ABBV] [MRK] [BMY] [LLY]