If you're a regular StreetAuthority reader, then you may have
heard of the "Dividend Decade." If you haven't, then it's a
prediction that in the next 10 years, the broadermarket will be
absolutely flat . Instead, dividends will account for
of the market's total return.
This means companies that steadily raise dividends will
outperform the overall market in the next decade. And one of my
favoritestocks that could benefit from this trend just went through
a major change, making it an even sweeter deal.
Health care giant
Abbott Laboratories (
celebrated the New Year by splitting itself in two. The legacy
pharmaceutical business, which was renamed
,will focus on breakthrough drug therapies. The company's
diagnostic tests, medical devices, nutritional products and branded
generic pharmaceutical operations were combined into a second
business that retains the Abbott name. Abbott structured the
breakup as a tax-free distribution to shareholders, with investors
receiving one Abbvie share for every Abbott share they held.
Abbott made a brilliant move by spinning off its pharmaceutical
business. Humira, its top-selling drug, accounts for more than half
this segment's business, and itspatent expires in 2017. Spinning
off this segment frees the rest of the company from its risks.
StreetAuthority Co-Founder Paul Tracy has even identified it as one
Top 10 Stocks for 2013
Abbvie will pay a rich $1.60 annualdividend , which at the
current $35 share price, provides a hefty 4.6%yield . Equally
important, Abbvie is already showing many of the characteristics of
a high-quality dividendstock . Abbvie generates plenty ofearnings
andcash flow , has a cash-richbalance sheet and a hugely
valuableasset in its blockbuster drug Humira.
The top-selling drug is used to treat rheumatoid arthritis,
psoriasis, Crohn's disease and other common auto-immune disorders.
Sales of the drug have doubled in the past four years. Humira is
expected to earn $10 billion inrevenue this year and accounts for
roughly half of Abbvie's total sales.
There is risk associated with Abbvie's loss ofpatent protection
on Humira three years from now, but analysts don't anticipate sales
will decline for several reasons. First, Humira belongs to a class
of drugs (biologics) that is extremely difficult to manufacture.
This will likely limit competition from generics. Second, because
of Humira's proven track record and dominant share in themarket for
rheumatoid arthritis drugs, physicians will probably continue to
utilize Humira as a first-line treatment even after generic
versions are launched. Third, overall sales of auto-immune drugs
are projected to grow 6% a year to reach about $48 billion by 2015.
Humira has already been approved as a treatment for nine different
illnesses and Abbvie has four more indications in late-stage
clinical trials that should help drive future sales growth. For
these reasons, analysts say Humira sales will likely continue to
rise and peak at more than $12 billion by 2017.
Abbvie also owns other category winners. These include a leading
testosterone replacement therapy drug, a hormonal therapy for
thyroid disease and two of the top-selling antiviral medicines for
Of course, when all is said and done, any pharmaceutical company
is only as good as its drug discovery pipeline. But AbbVie has made
impressive progress in recent years through internal drug
development, and licensing and collaboration deals. The company is
considered second only to
Gilead Sciences (Nasdaq: GILD)
in the strength of its hepatitis C drug franchise. Both companies
are developing new oral treatments for hepatitis C, a deadly
disorder that infects 180 million individuals worldwide.
Beginning in 2015, Abbvie expects to begin launching four major
new drugs in rapid succession, each of which is estimated to be
worth $4 to $6 billion in peak sales. In all, the company has a
total of 20 new drugs in mid- to late-stage development.
In addition to a flourishing new-drug pipeline, Abbvie has a
global footprint that few new-drug companies can match. The company
has commercial operations worldwide and sales in more than 150
countries. Abbvie plans toleverage this global presence in the next
several years and is targeting nearly $1 billion in new sales from
Thestock split happened in early January, so Abbvie won't be
reporting sales and earnings as a stand-alone company until the
first quarter is completed. However, the past performance of
Abbott's proprietary pharmaceuticals business provides a framework
for what Abbvie investors can expect. During the first nine months
of 2012, sales of proprietary pharmaceuticals improved 7% to $12.9
billion, fueled by a 29% jump in Androgel sales and a 19% increase
in Humira sales.Operating income for this business rose 13% to $5.6
billion andprofit margins were generous even by pharmaceutical
industry standards at 43%. Analysts predict Abbvie will likely
generate sales of $18 billion next year and 2013 earnings per share
estimates range from $3.03 to $3.17.
This stock has $7.2 billion ofcash and an
investment-gradecredit rating . The company is also a cash machine
that generates roughly $6 billion of cash flow a year, which will
more than twice covers the $2.5 billion annual dividend payment.
Management targets 50% payout of cash earnings for the dividend on
an ongoing basis and is strongly committed to dividend growth.
Old Abbott had a stellar track record, increasing dividends 40
years in a row, including a 6% dividend increase just prior to the
breakup to an annualized rate of $2.16 a share. Abbott divided the
dividend amount between the two companies when they split. As
stated before, Abbvie plans to pay a $1.60 annual dividend
currently yielding 4.6%, while Abbott will pay a 56-cent annual
dividend that yields 0.9%.
Risks to Consider:
Many new drugs never reach the market and there is noguarantee
that Abbvie's pipeline will deliver future revenue and profits.
However, this risk is mitigated by the fact that half of Abbvie's
pipeline products are in late-stage development when risks are
smaller. Also, in connection with the breakup, Abbvie raised $14.7
billion of debt, which was used to make an $8.5 billion cash
payment to Abbott. However, with cash flow from operations close to
$6 billion annually and no major debtmaturities before 2015, Abbvie
shouldn't have any problem servicing its debt.
Action to Take -->
By purchasing Abbvieshares now, investors can collect a 4.6%
dividend while they wait for new drugs to launch beginning in 2015,
which should fuel earnings growth as well as share price gains.
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