AbbVie Inc (ABBV): A Cheap Dividend Aristocrat Yielding Over 4%

In addition to its healthy payout ratio, AbbVie has generated sales growth in each of the last five years. We don’t have data that goes back to the last recession, but pharma companies are generally recession-resistant because consumers still need to treat their illnesses regardless of how the economy is doing. The bigger risk to sales cyclicality is patent expirations of major drugs such as Humira. AbbVie needs to develop new drugs that can eventually replace those sales or else it could see a steep revenue decline that could endanger the dividend.

Few businesses can generate operating margins in the teens, much less in the 30% range like AbbVie has done. Management expects margins to hit 50% by 2020, highlighting the extreme profitability enjoyed by pharma companies. High returns allow companies to compound their earnings faster and are usually a sign of competitive advantage (intellectual property and drug development expertise, in this case).

Source: Simply Safe Dividends

Some investors have expressed concern about AbbVie’s balance sheet. At first glance, the company’s $31.7 billion debt burden, largely resulting from AbbVie’s $21 billion acquisition of Pharmacyclics in 2015, does raise some eyebrows.

However, AbbVie could cover all of its debt using the $8.4 billion it has in cash and about 3.1 years’ worth of earnings before interest and taxes (EBIT), which is reasonably healthy. Standard & Poor’s and Morningstar have given the company A and A- credit ratings, respectively. We would like to see AbbVie reduce its debt over the next few years while it is generating strong free cash flow from Humira. If Humira’s revenue unexpectedly shrinks over the next five years, the balance sheet could become strained.

Source: Simply Safe Dividends

Overall, AbbVie’s dividend looks very safe at the moment. The company has a healthy payout ratio, generates plenty of free cash flow, and is enjoying double-digit earnings growth.

However, the trajectory that Humira’s revenue takes beyond the next few years, coupled with developments in AbbVie’s drug pipeline, will significantly impact the safety of the dividend from 2020 and beyond.