Why Wall Street Can’t Get Enough of This Dividend King

AbbVie (ABBV +0.95%) was spun off from Abbott (ABT +2.29%) in 2013. That’s an important fact to keep in mind when you look at AbbVie’s Dividend King status. Technically, it hasn’t increased its dividend annually for 50 years because it hasn’t existed as a stand-alone company for 50 years. But don’t let that fact dissuade you from looking at this much-loved dividend stock. Here’s what you need to know.

Carrying the Dividend King mantle

While AbbVie inherited its status as a Dividend King from its former parent, Abbott, it has increased its dividend every year since the spin-off. It is clear that AbbVie understands how important dividends are to its shareholders.

Image source: Getty Images.

Meanwhile, today’s yield is quite attractive at 2.7%. For comparison, the S&P 500 Index‘s (^GSPC +0.05%) yield is only around 1%, and the average pharmaceutical stock’s yield is just 1.5%. The problem is that the payout ratio is a shockingly high 330% right now. But that’s not necessarily the best gauge here.

AbbVie generates high, recurring cash flows from drug sales. Since dividends are paid from cash flow, the earnings picture isn’t a complete view of a company’s dividend-paying ability. Looking at cash flows, AbbVie’s cash dividend payout ratio is around 60%. That suggests the dividend is on much firmer ground than it appears to dividend investors at first. Meanwhile, the balance sheet is investment-grade rated, so the company is financially strong.

What about AbbVie’s drug business?

AbbVie has a strong foundation in immunology and oncology. Through acquisitions, it has entered the aesthetics and neuroscience spaces, while bolstering its oncology position. Immunology is an interesting example of the company’s drug pipeline.

Humira was a blockbuster drug for AbbVie, but like all drugs, it eventually lost patent protection. When that happens, revenues usually fall as generic versions of the drug enter the market. However, AbbVie introduced Skyrizi and Rinvoq, which appear to be more effective than Humira. That has helped to soften the hit from Humira’s patent expiration.

Notably, AbbVie recently agreed to buy Apogee (APGE +0.01%) for roughly $11 billion. According to AbbVie, the deal will bring with it “multiple clinical-stage candidates in development across inflammatory and immunological diseases, including atopic dermatitis (AD) and asthma.” Essentially, this transaction builds on the company’s strengths and positions it well for the future. That’s exactly what the company achieved with previous acquisitions, including Allergan, Cerevel, and ImmunoGen.

Today’s Change

(0.95%) $2.44

Current Price

$259.36

Key Data Points

Market Cap

$458BMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.

Day’s Range

$256.76 – $260.22

52wk Range

$187.62 – $261.63

Volume

4.2M

Avg Vol

6.9M

Gross Margin

70.58%

Dividend Yield

2.63%

But there’s another nuance hidden in the portfolio, as well. The company makes Botox, a drug whose patent protection has expired. However, this drug falls into the aesthetics category, where brand names are much more important. So, it remains a very profitable source of revenue for the company and will likely remain so for years to come. That’s a foundation that most pharmaceutical companies don’t have. Botox, meanwhile, is also finding healthcare uses, including its approved treatment of migraines, and is being used off-label in other areas, such as erectile dysfunction, which could lead to approved uses down the line.

When you step back and look at the big picture, AbbVie has a proven track record of developing valuable drugs. It has a proven track record of acquiring companies with attractive drug candidates. And it has an underlying foundation in Botox that differentiates it from its peers.

AbbVie: A worthwhile long-term dividend holding

As a spin-off, AbbVie may not have earned its place on the Dividend King list. But it has certainly proven it deserves to stay on the list. Given the attractive yield, it’s little wonder why Wall Street can’t get enough of this high-yield drug maker. If you are a long-term dividend investor, you might want to get in on the action, too.