PPC Ian

I am incredibly excited to announce that I am purchasing position number 41 in my dividend stock portfolio. I’m talking about a stock that has gone on bargain basement sale. As a dividend value investor, I just cannot pass up this opportunity. I’m talking about AbbVie (ABBV).

If you’ve been following my YouTube Channel for a while (we’re now 30,000 dividend stock investors strong), you know that I have been watching AbbVie for a while. In fact, I was thinking about buying 2018, but I just did not like the current value at that time (starting yield too low) and the dependence on Humira (61% of revenue with patent expiring in 2023).

I’m excited to announce that the world changed in such an unexpected way (this is what makes dividend investing so much fun). AbbVie announced they will acquire Allergan (AGN), the maker of Botox, for $63 billion dollars! With this acquisition comes a ton of diversification and a great starting dividend yield since AbbVie stock has been in free fall and fell another 16% on the news! My two concerns have been answered: Humira is down to 41% of total sales and AbbVie’s starting dividend yield is now 6.51%. More than that, the forward 2019 PE on Abbvie at current levels ($65.79 per share) is 7.49. Does not get much better than that from a value standpoint!

Check Out My AbbVie YouTube Video

Let’s start today with my video analysis of AbbVie, filmed while chillin’ at the Holiday Inn.

Here’s Why I’m Buying AbbVie (ABBV) Stock

I want to start out today with the good stuff, my overall conclusions on the situation with AbbVie and Allergan. Let’s jump into the pros and cons of this acquisition.

Pros of Owning AbbVie (ABBV) stock

• AbbVie is a dividend GROWTH powerhouse (5-year compound annual growth rate of 21.75%) with a high starting yield of 6.51%. It is SO rare to find a dividend stock that exhibits a high starting yield AND high growth. ABBV may be the BEST example of this around right now.
• Value is unparalleled. Current share price is $65.79. Forward 2019 consensus estimate for EPS is $8.78. $65.79 / $8.78 gives me a 2019 PE (price / earnings ratio) of 7.49. YES, yes, y’all.
• Concentration risk is way down. Humira becomes 41% of the combined company revenue.
• Dividend payout ratio on ABBV right now is only 49% on forward 2019 EPS. They have room to increase the dividend.
• Allergan has some concentration on Botox (about 29% of their revenue), but overall they have a nicely diversified portfolio. I think this brings a world of diversification to the combined entity – love it.

Cons of Owning AbbVie Stock

• There is a trend out there against certain companies. Two sectors that the more liberal folks don’t like include sin stocks and pharmaceuticals. Some folks believe that these sectors are hurting our health care sector and hence they want to attack them. For example, ABBV raised Humira cost by 9.7% in 2018. Some believe that is costing the health care system too much. (The argument is not valid, in my opinion, because EVERYTHING out there costs the healthcare system money. For example, everyone is using their smartphones too much. Everyone is bent over looking at them all day. I’m sure that costs the healthcare system quite a bit. And, what about all those burgers that we all eat? That said, I digress, and don’t want to get into the political stuff here.) Due to this single reason, I am careful to diversify my portfolio. I am already heavy on pharma (due to my positions in Johnson & Johnson (JNJ) and also Pfizer (PFE)). ABBV will never be a huge position due to associated risk.
• Debt levels are going to be huge! AbbVie has $36.6 billion in long term debt. Allergan has $23.8 billion in long term debt. The acquisition will be funded via stock and cash. Based on my calculations, it looks like the cash component will be $40.26 billion. Adding all that up, we’re looking at $100.66 billion in total debt – yikes! Thankfully, interest rates should be low for a while and hopefully AbbVie pays that debt down fast.
• There’s still a lot of concentration in Humira and the patent expires in the US in 2023. That said, AbbVie now has settlements with Samsung and Amgen to receive royalties from their biosimilars. (Go, AbbVie Legal team – yes!)
• Huge concentration of revenue in the US. I would prefer more globally diversified revenue.

Annual Report Analysis

During my analysis, I started digging into the annual reports, and here’s what I found for AbbVie:

Revenue is growing fast. It goes from $19.9 billion in 2014 to $32.8 billion in 2018, or a 4-year CAGR of 13%. This truly is a dividend GROWTH company. Some folks believe that dividend stocks are boring and don’t grow… WRONG!
• Net earnings are not growing as fast. While they surge from 2014 to 2015, I feel that’s a one-year anomaly. So, I start looking at 2018 vs. 2015. 2018 vs. 2015 analysis, or 3-year CAGR, is 3% – not as strong as revenue growth would imply.
• Net margins are a nice 17%.
• Diluted EPS has a 3-year CAGR of 5%. (I again look at 3-year period due to weird 2015 vs. 2014 surge.)
• Long-term debt has a 3-year CAGR of 5%.
• US accounts for 66% of their business, by revenue.
• Humira, the world’s biggest selling drug, accounts for 61% of their revenue.
• Comparing 2018 vs. 2016, cash flow surges 91%. I absolutely love the cash flow growth.

Here’s what I’m seeing in the Allergan (AGN) annual report:

• Strong revenue growth! Comparing 2018 vs. 2014, CAGR is 36%! (That said, I do see a similar phenomenon where there’s a big jump comparing 2015 vs. 2014 – just like ABBV). Looking at the 3-year CAGR (2018 vs. 2015), I’m getting a nice revenue CAGR of 8% – still very impressive.
• So far, they are losing money! This is a bit concerning. That being said, consensus estimates to have the company making great money this year – more on this next.
• US accounts for 78% of the revenue of this Irish company! Sure wish there was more international.
• Worth noting – AGN had a 2% range dividend before the huge share price run-up (due to the acquisition). They started paying a meaningful dividend in 2017, and have been raising it. I do think the combined company will take a note from ABBV’s management and pay MASSIVE dividends.
• A fun note on AGN: Their Botox drug is trademarked, but has no patent. They did this on purpose since trademarks never run out, while patents have a 20-year span. That said, trademarks offer less protection. So interesting how the legal teams do what they do at these pharma companies. There is a competitor to AGN that has created a biosimilar to Botox, and AGN is going after them for copying the formula. We shall see how that turns out.

Is AbbVie Paying a Fair Price For Allergan?

So, I started wondering if ABBV is paying a fair price for this acquisition that greatly diversifies their business at a time when Humira patent is running out of steam. I think they are! Here’s how I look at it: The total deal price for the buyout values AGN at $188.24 per share. If I take $188.24 and divide by 2019 consensus estimates of $16.64 EPS, I get a forward 2019 PE of 11.31. I feel that 11.31 PE is a very fair price for ABBV to buy AGN – nice.

I’m Buying This Dividend Stock

Here’s where I’m personally at. I own 40 dividend stocks right now and ABBV will become position 41. Right now, I’m coming back from a business trip. I have no ability to buy stock on the road since I don’t log into brokerage accounts from the road. I only do this on secured (not shared) networks. So, I missed the deep discount and ABBV already jumped up a few percent today. That is OK. This stuff does not have to be precise. It’s directional and ABBV is still near its lows (and I think it will stay around here for a while +/- 10 or 15%).

I don’t have a ton of spare cash sitting around right now. So, I’m going to buy a big chunk now, but it will take me a good year of averaging in to arrive at my full position (around 0.8% or 0.9% of my portfolio). I may not get the bottom, but I’ll accumulate my shares near the bottom (close enough, I’m ok since I like to buy and hold forever). I’m using the same strategy to build my ABBV position that I used for General Mills (GIS) last year. I enjoy having a “pet stock” like that where I’m building the position because it keeps me focused each month on getting the position to target size.

Of course, I’m being real with myself here that this needs to be a smaller position. I already have JNJ and also PFE. ABBV is riskier, in my opinion. That said, I like the yield and I like the diversification in a sector that does carry some risk. I’m also being real that a lot of loud people out there vocally don’t like the sector. I’m taking on some risk here consciously, just like I do with sin stocks. Don’t want to fool myself. There is risk here!

Right now, I’m trying to bring up my current cash flow. We want to start using some of our dividends to pay bills SOON (any year now). As such, my focus switches a bit more to high yield and that’s what I’m thinking when I buy stocks these days. ABBV is nice in that it offers that high yield and growth. I will continue to share my ABBV journey as it unfolds on My YouTube channel and My Twitter too – so please make sure to subscribe! What do you think? Please share in the comments below!

Here’s My Original Video Analysis of Abbvie from Last Year (2018)

DISCLOSURE: I am long Apple (AAPL), Altria (MO), Johnson & Johnson (JNJ), Pfizer (PFE), and General Mills (GIS). I own these stocks in my stock portfolio. I plan on initiating a position in AbbVie (ABBV) in the next few days.

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