I’m Buying This Dividend Stock Pick Immediately (AbbVie)

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:

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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Because the information herein is based on my personal opinion and experience, it should not be considered professional financial investment advice or tax advice. The ideas and strategies that I provide should never be used without first assessing your own personal/financial situation, or without consulting a financial and/or tax professional. My thoughts and opinions may also change from time to time as I acquire more knowledge. These are, as discussed above, solely my thoughts and opinions. I reserve the right to delete any comments for any reason (abusive in nature, contain profanity, etc.). Your continued reading/use of my YouTube Channel, blog, email newsletters, whitepapers, Excel files, and other materials constitutes your agreement with and acceptance of this disclaimer.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.

Dividend Stock Pick

By PPC Ian Leave a Comment May 21 0

I truly enjoy a good buying opportunity in the stock market. I invest for dividends, and one day my dividends will cover all of my living expenses. When my favorite stocks go down in share price, my starting dividend yield goes up (in other words, I reach financial freedom faster). Needless to say, I love a good buying opportunity (and these have been very rare in recent years due to the overall lofty stock market).

Lately, I have enjoyed buying shares of my favorite industrial companies, because they have been plagued with lackluster earnings reports and overall macroeconomic issues. Our strong economy and overall bull stock market is in its late stages, in my opinion. A recession and stock market crash is on the horizon, most likely, within the next few years. As leading indicators, some of my favorite industrials are starting to exhibit weakness. This is to be expected, as they are cyclical. Large B2B (business to business) purchases can be delayed, unlike a consumer purchase of Huggies Diapers by contrast.

Regardless of market conditions, I am always averaging into stocks because I am unable to perfectly time the market and I enjoy immediate cash flow. After all, I want the opportunity to tap into my dividend cash flow at any time. I solely invest for cash flow, and do not care about capital appreciation (although I do view long term capital appreciation as a proxy of solid company performance). Some of my favorite industrials are on sale right now and I am buying!

One of my favorites (in fact my #10 favorite dividend stock of all time) is 3M (ticker MMM). Over the past few weeks, I have truly enjoyed averaging into this industrial stock, with a rare 3.44% starting dividend yield and a PE (2019 forward) in the 17.58 range. And, these guys sport a 5-year dividend CAGR (compound annual growth rate) of 11% (although I expect dividend increases to slow a bit over time). I expect to continue adding to my 3M position throughout 2019 as long as the share price remains low.

Everyone knows about my stake in 3M and my latest purchases from my 3M YouTube videos. However, there is another industrial stock that I have owned for years that is also a relative market value right now. (It’s not a top 10 favorite stock like 3M, and is a smaller position, although one I love.) It seems like nobody talks about this stock. It’s a smaller one, but a powerful one from a dividend standpoint (they have increased their dividends for the last 48 years, a track record only surpassed by 10 US companies). I’m talking about Leggett & Platt (LEG).

For those unfamiliar with Leggett & Platt, they produce white label beds, springs, and furniture. When you go to a hotel room or an office, for example, a good portion of the furniture are likely from Leggett & Platt (or at least assembled with Leggett & Platt parts). They are also involved in the automotive, aerospace, wire, rod, fabric, machinery, hydraulic cylinder, and specialty foam industries too. With their recent acquisition of Elite Comfort Solutions, a foam mattress company, Leggett & Platt has truly solidified themselves as a leader in the mattress segment. At the end of the day, everybody needs to sleep and everyone enjoys sleep so much more with a comfortable mattress. I do not see Leggett & Platt’s business going anywhere.

At a high level, there are five key reasons I absolutely love Leggett & Platt right now!

Reason 1: Their starting dividend yield is a sweet ($0.40 * 4) / $37.90 = 4.2%, a very solid starting yield in this market.
Reason 2: They recently raised their quarterly dividend from $0.38 to $0.40, an increase of 5.3%. Such an increase shows that management is very confident in the business, despite the macroeconomic issues. A shareholder-friendly company, they have increased their dividend for the last 48 years!
- In the last 5 years, their dividend is up 33% or 5.92% per year on average (CAGR).
Reason 3: Looking at the average analyst estimate of $2.47 2019 forward EPS, I get a 2019 forward PE ratio of $37.90 / $2.47 = 15.34.
Reason 4: I originally initiated my LEG position at $29.43 per share back in 2013. At $37.90, I feel like we are getting into really low share price territory from a historical perspective. I love purchasing shares in 2019 in the $30s.
Reason 5: Dividend payout ratio is reasonable. At $1.6 per year, dividends represent 65% of EPS, providing the company sufficient buffer for the unexpected. (Worth noting: Management does want the payout ratio to reach 50%, meaning dividend growth will likely be a bit slower until the ECS acquisition is fully digested.)

Now, this business does not come without risk. From a size standpoint, their market capitalization is $4.96 billion. Overall in terms of my dividend stock portfolio, Leggett & Platt is one of my smaller positions. I like smaller companies because they provide diversification to the portfolio and have potentially more upside (easier to grow when you are smaller vs. larger). That said, smaller companies can sometimes be more susceptible to competitive forces and adverse M&A activity (hostile takeovers and private equity, for example).

Perhaps more than this, however, I am concerned about foreign competition. While Leggett & Platt has been in business since 1883 and literally invented the bedspring, one must always keep their eyes on lower cost alternatives from overseas in our now global economy. In fact, recent company releases even discuss a foreign "anti-dumping" matter they are currently working on. Due to their large patent portfolio, breadth of capabilities, and multitude of business units, however, I generally believe LEG has staying power.

I’d like to close out today’s dividend stock profile with some interesting metrics from Leggett & Platt’s 2018 annual report:

This is a very high revenue (and lower net margin) business. Net earnings in 2018 were $306 million on $4.270 billion of sales! ($306 / $4,270 = 7.17% net margin)
Revenue growth trends are nice. 2018 is up, in particular due to the ECS acquisition. However, even looking pre-acquisition (2017 vs. 2013) revenue has increased steadily each year and is up 13.4% in total.
Earnings per share are up nicely in the 5-year period. Comparing 2018 vs. 2013, EPS is up 68.66%.
Net cash provided by operating activities is a bit less "up and to the right" as compared to revenue and EPS (it’s a bit more up and down). That said, it has increased by 5.5% over the 5-year period. This will be a key metric to watch in upcoming annual reports.
The balance sheet appears to be well-managed with assets exceeding liabilities (positive shareholder’s equity). It will be important to watch the balance sheet, however, now that the ECS acquisition has been completed. (I hope they pay down debt quickly, over the coming years.)
Their business is very diversified! Following are sales by product line:
- Bedding Group: 21%
- Automotive Group: 19%
- Fabric & Flooring Products Group: 17%
- Work Furniture Group: 7%
- Consumer Products Group: 11%
- Home Furniture Group: 9%
- Wire Group: 9%
- Aerospace Products Group: 4%
- Hydraulic Cylinder Group: 2%
- Machinery Group: 1%
LEG has a nice Patent and Trademark portfolio. The patents, in particular, create a competitive moat.
- 1,427 patents issued
- 598 patents in process
- 980 trademarks issued
- 143 trademarks in process
Sales are geographically diverse, although I’d like to see even more international exposure.
- USA: 63%
- Europe: 12%
- China: 12%
- Canada: 7%
- Mexico: 4%
- Other: 2%

While Leggett & Platt will never be a core position in my 40-stock portfolio, I am so proud for it to play a supporting role. That’s why I went ahead and purchased more shares today at $37.90, and I’ll continue to look for opportunities to pick up more shares throughout the year. Ultimately, I believe in their diversified business, I love the exposure to industrials (I tend to be underweight in that sector), and I’m a fan of the 4.2% starting yield!

DISCLOSURE: I am long Leggett & Platt (LEG), 3M (MMM), and Kimberly-Clark (KMB). I own these stocks in my stock portfolio.

COPYRIGHT: All PPC Ian videos, Excel files, guides, and other content are (c) Copyright IJL Productions LLC. PPC Ian is a registered trademark ™ of IJL Productions LLC.