Should You Buy AbbVie Inc. For Income and Growth?

AbbVie Inc. (NYSE:ABBV) is one of my top eight U.S. stock picks for February available through my premium service. AbbVie offers a high dividend yield and above-average dividend growth.

Among the eight top picks, there are two high, safe yield ideas, three high-growth ideas, and two value ideas. Seven other great companies were also considered but didn’t make the list; I briefly talked about them in the premium service including their growth prospects and entry points.

drugs

Here’s Morningstar’s business overview on AbbVie:

“AbbVie is a pharmaceutical company with a strong exposure to immunology and oncology. The company’s top drug, Humira, represents over half of the firm’s current profits. The company was spun off from Abbott in early 2013.”

AbbVie offers a nice yield of 4.1%. However, it is a riskier stock because of its reliance on Humira. Moreover, it is highly leveraged.

I’ll compare AbbVie with a safer company like Pfizer (NYSE:PFE) as an example.

In the latest quarter, AbbVie had a financial leverage of 10.3 while Pfizer’s was 2.82. So, AbbVie has higher debt levels in an attempt to drive higher growth.

Indeed, AbbVie has posted high returns on equity since 2013.

2013 2014 2015
ABBV 105% 57% 181%
PFE 28% 12% 10%

Source: Morningstar

Because AbbVie has relatively high debt levels, it makes it all the more important that it has strong liquidity ratios. Indeed, its liquidity ratios look alright. In the latest quarter, its current ratio was 1.79 and its quick ratio was 1.42. Comparatively, Pfizer had lower ratios of 1.11 and 0.78, respectively, as it has lower leverage.

Similarly, AbbVie has a higher trailing twelve month (“TTM”) interest coverage ratio of 9.32 than Pfizer’s 6.90, which is a given because of AbbVie’s highly leveraged nature.

AbbVie logo

Because AbbVie is a higher risk investment than Pfizer, one would expect to earn a higher return from investing in AbbVie. The analyst consensus (across 28 analysts) expects AbbVie to grow its EPS by 11.8-14.4% per year in the next 3-5 years.

So, AbbVie’s estimated annualized returns are at least 15% without accounting for any multiple expansion.

In its January 6, 2017, report, Value Line gave AbbVie a safety rating of 3 (out of 5) and a financial strength of A. Value Line had a 3-5 year price target range of $90-135 for AbbVie, which traded at $62.50 per share and yielded 4.1% at the time, and implied annualized returns of 13-24%.

Morningstar rates AbbVie as a narrow-moat company with a fair-value estimate of $73 and a consider buy price of $51.10. So, Morningstar thinks AbbVie is undervalued.

Since spinning off from Abbott Laboratories, AbbVie has increased its dividend every year. Its 3-yr DGR is 13.7%. It last increased its dividend by 12.2%. Its payout ratio is about 50%.

Takeaway: AbbVie is a higher risk company that can deliver higher returns and offers a yield of 4.1% to start. For a bigger margin of safety, cautious investors can consider buying some shares if it reaches the $53-57 level, implying a yield of 4.5-4.8% to start.

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Disclosure: At the time of writing, I own shares of Pfizer.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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