Stock of the Week
Nasdaq Symbol: ABBV
Industry: Drug maker
Price as of 10/30: $85.10
The major averages started the month of October on the plus side rising 5% in the first two weeks as the market rally broaden out to small cap and mid cap stocks along with the beaten-up sectors. However, as COVID-19 cases have risen around the country and the globe, coupled with the pending Presidential election, the major averages gave up their gains declining for the second straight month. Wall Street hates uncertainty. Following Tuesday, some of the uncertainty should be alleviated. Following the election, hopefully Congress will pass a second stimulus deal to aid the economy as we wait for a vaccine. With the virus effecting most businesses, corporations have had to cut costs to preserve cash waiting for the global economy to revive. This week we will highlight a drug stock that not only has strong cash flow, but actually hiked their dividend 10% following earnings, boosting their yield to 6%. The featured stock of the week is AbbVie.
Back in May, Abbvie acquired Allergan for $63 billion. The merger has diversified AbbVie away from their autoimmune treatment Humira to oncology drugs, into the immunology space along with bolstering their presence in other areas like medical aesthetics, neuroscience, eye care, and women's health. This past week, AbbVie earned nearly $2.3 billion beating expectations as the merger boosted sales by 51.9% to $12.88 billion. AbbVie raised earnings estimates for the full year thanks to cost cuts and synergies from the Allergan merger. AbbVie's acquired Botox anti-wrinkle treatment saw a resurgence in sales as hospitals around the country and globe reopened following the pandemic this spring. AbbVie's pre-merger businesses grew 4% from the year-ago period. The company's biggest product, the autoimmune treatment Humira, grew sales in the U.S. by 8%, to $4.2 billion, but suffered attrition abroad where it now competes against generic versions. Next year AbbVie will see more generic competition so the company is developing autoimmune treatments, Rinvoq and Skyrizi, which could deliver $2.2 billion in combined revenue this year.
The best part of AbbVie is the valuation and cash flow. Currently, AbbVie trades for 8 times earnings, 7 times next year's earnings and 3 times sales. AbbVie has generated $12.7 billion of operating cash flow in the first nine months of the year with a current cash and investment balance of $8 billion. AbbVie is on track to pay down $15 billion to $18 billion of combined company debt by the end of 2021.
With their recent dividend hike, AbbVie has now hiked their dividend 225% in the last seven years and increased their dividend for at least 25 consecutive years. With a number of analyst price targets 30% above current levels, shareholders could enjoy great income and capital appreciation in AbbVie's stock for years to come.
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