AbbVie Inc. (ABBV) discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company was created in 2013 when Abbott Laboratories split into two companies – Abbvie and Abbott. Abbvie continued raising dividends to shareholders for the five years since becoming a separate publicly traded company. The company is a dividend aristocrat., with a 45-year track record of annual dividend increases.

GAAP Earnings per share have been largely flat since 2013. The company does provide a reconciliation between GAAP and non-GAAP earnings, however. The non-GAAP earnings have been increasing.

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However, Abbvie is expecting GAAP adjusted earnings per share of $6.47 - $6.57/share in 2018. Based on those forward earnings, the stock seems attractively valued today.

The downside with Abbvie is that the company generates 60% of its sales and a larger share of profits from a rheumatoid arthritis drug called Humira. The drug’s patent expired in 2016 in the US and is expiring in 2018 in the European Union. However, due to the drug being a bio-similar, there are over 70 patents that provide some intellectual property protection until sometime in 2022 according to Abbvie.

Humira sales have been growing rapidly, and will likely continue going strong until competitors catch up to it. Abbvie projects that Humira sales will peak at $21 billion in 2020, up from $ 18.50 billion in 2017. It is possible that sales can continue growing at a healthy clip until 2022, after which they will start decreasing as competitors nibble at Humira’s market share. If the market it serves expands, or there are new uses for the drug, it is possible that sales can actually be maintained, even if we have increased competition. 

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I do not like the huge reliance on a single product, because it decreases the margin of the safety factor. I also do not like the fact that this product will certainly face higher competition in the years to come. The third fact I do not like is that I do not see another blockbuster drug that will replace Humira’s sales after 2022. While there are many compounds in different stages of clinical trials, it would take several new drugs to compensate for the eventual loss of Humira’s sales.

As a dividend investor, I need growing earnings in order to have a growing dividend income. If the current business model cannot be forecasted into the future, it may mean that the company may not be the type of buy and hold investment that can be safely be tucked into your portfolio. It may need more monitoring.

On the other hand, others may argue that these headwinds are already priced into the shares. As a result, despite the problems that are expected to occur in the 2020s, investors will do ok and enjoy a high dividend income in the meantime. To put things in perspective, Pfizer faced its own patent cliff in 2011, when large drugs were set to lose patent protection, impacting future profitability. In 2009 the company bought Wyeth. Fast forward a decade from now and the company's dividend has been restored after a dividend cut. Investors who bought Pfizer a decade ago have done pretty well for themselves.

Perhaps Abbvie could similarly acquire growth through acquisitions as well. Hopefully, they do not overpay for those acquisitions and do not decide to cut the dividend in the meantime.

The annual dividend per share has increased from $1.60/share in 2013 to $2.56/share in 2017. Based on its most recent dividend increase, the company’s forward annual dividend comes out to $3.84/share.  

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The dividend seems adequately covered based on forwarding earnings for 2018. The forward dividend payout ratio comes out to 59.40%. However, if earnings per share over the next decade end up falling off a cliff if Humira sales start decreasing, the dividend may be in a dangerous territory sometime in the latter part of the next decade. 

I find Abbvie to be attractively valued today at 14.60 times forward earnings and yields 4.10%. While the future is unclear as to where future growth in sales will be generated after Humira, the stock can still deliver solid returns in the near term. Some may argue that the future uncertainty is somewhat priced in the stock already. That being said, the stock could still provide good entry points for investors on bad news.

I am glad I held on to my Abbvie and Abbott stock following the split in early 2013. However, I am unsure about adding more to Abbvie at present levels. Abbvie seems like a company that needs closer monitoring because it is not the type of business where future growth can be taken for granted. On the other hand, the dividend seems sustainable at the moment, and will likely grow for the next four - five years at a high single digit rate. Investors today need to decide for themselves whether the current valuation is attractive enough to outweigh future risks. Either way, investors are getting paid generously to hold onto their Abbvie shares.