This Dividend Stock's Got the Right Medicine for Investors

The U.S. health care sector is an attractive area for long-term investment, as the industry benefits from the aging population. A very large segment of older Americans will create high demand for health care products and services. For investors, pharmaceutical giant AbbVie  (ABBV)  is an attractive stock for dividends and growth.

AbbVie stock has a high dividend yield above 5%. It also has a strong track record of dividend growth. It has increased its dividend payout consistently, since it was spun off from Abbott Laboratories (ABT)  in 2013. Going back even further, AbbVie qualifies as a Dividend Aristocrat if including its days as a subsidiary of Abbott, which is also on the list of Dividend Aristocrats.

AbbVie is going through a period of business transformation. The market is concerned about AbbVie's long-term direction, now that its flagship drug Humira is losing patent expiration. But the company is making major investments that will keep it on a growth path moving forward. In the meantime, the stock is cheap, with a high dividend yield, making AbbVie an attractive pick for value and income investors.

Steady Results, Even in a Pandemic

AbbVie is a $159 billion market cap pharmaceutical company spun off by Abbott Laboratories in 2013. Its most important product is Humira, which by itself represents nearly half of AbbVie's total revenue. Humira is a multi-purpose pharmaceutical product and was the top-selling drug in the world in 2019. Humira is now facing biosimilar competition in Europe, which has had a noticeable impact on the company. It will lose patent protection in the U.S. in 2023.

Even with lingering headwinds from the loss of Humira in the international markets, as well as the global pandemic, which has depressed global economic growth, AbbVie continues to generate steady growth. AbbVie reported second-quarter earnings results in late July, showing revenue of $10.4 billion increased 26% year-over-year, while adjusted earnings-per-share increased 4% year-over-year to $2.34 for the quarter.

AbbVie enjoyed broad-based growth last quarter. Global Immunology sales were $5.31 billion, up 8.6% operationally. While net revenue for Humira declined 17% in the international markets, U.S. growth of 4.8% helped serve as an offset. Also boosting results were Skyrizi, which generated net revenue of $330 million and Rinvoq's net revenue of $149 million.

The company is also seeing strong growth in Hematology, which posted 26% revenue growth last quarter. This was largely thanks to Imbruvica, which generated 17% revenue growth last quarter. Separately, global Venclexta revenue reached $303 million, an increase of 81% year-over-year. We see the combination of new growth products, as well as the huge acquisition of Allergan, will provide AbbVie with a long-term growth runway.

Growth Injection

AbbVie's major risk is loss of exclusivity for Humira. Fortunately, the company's massive research and development platform is a competitive advantage. Adjusted research and development expense totaled $5 billion in 2019, and the investment is already paying off. AbbVie has received 14 major approvals since 2013, with 10 of those coming in the core categories of immunology and oncology. AbbVie has multiple growth opportunities to replace Humira such as Imbruvica, Venclexta and Skyrizi.

Despite the challenge posed by loss of exclusivity on Humira, we believe AbbVie has long-term growth potential. First, it has invested heavily in building its pipeline of new products. AbbVie also completed the $63 billion acquisition of Allergan. Allergan's flagship product is Botox, which diversifies AbbVie's portfolio with exposure to global aesthetics. The combined company will have annual revenues of nearly $50 billion. AbbVie expects the transaction to be 10% accretive to adjusted earnings per share over the first year, with peak accretion of greater than 20%. Second-quarter global revenue reached $481 million for AbbVie's Aesthetics portfolio, including $226 million in revenue for Botox.

Based on expected 2020 EPS of $10.40, AbbVie trades for a price-to-earnings ratio of 8.6-times. We believe a single-digit valuation multiple is too low for a company of AbbVie's quality. It is easy to see why AbbVie has not earned a higher valuation -- the market is clearly worried about AbbVie's future growth given the looming loss of patent exclusivity for Humira in the United States. After all, it has often been said that the market hates uncertainty. But we view these fears as overblown. In our view, AbbVie has proven that it has a viable path for growth through its internal R&D as well as the acquisition of Allergan.

Our fair value estimate for AbbVie is a price-to-earnings ratio (P/E) of 10-times to 11-times. Therefore, we view AbbVie as undervalued. An expanding P/E multiple to 10.5-times by 2025 could boost shareholder returns by approximately 4.1% per year over the next five years. In addition, we expect annual earnings growth of 5.0%, while the stock has a 5.3% dividend yield. Putting it all together, we expect total annual returns in excess of 14.0% per year over the next five years. This is a very strong expected return which makes AbbVie stock a buy.

AbbVie is also a highly appealing stock for income. The company currently pays a dividend of $4.72 per share on an annualized basis, good for a current yield of 5.3%. Considering the S&P 500 Index as a whole yields less than 2% right now, AbbVie is a high-yield stock.

AbbVie stock is a rare combination of value, growth, and yield, making it a unique pick in the health care sector. Investors can use the market's short-term pessimistic sentiment as a long-term buying opportunity for this high-quality business.

(ABBV and ABT are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

At the time of publication, Ciura was long ABBV.