Declining earnings haven’t scared billionaire investors away from this stock.
Dividend stocks aren’t just for folks who want to build up a stream of passive income. Billionaire investors who don’t need any more income to retire comfortably regularly invest in businesses that pay dividends because they tend to outperform their non-dividend-paying cousins over time.
Non-dividend-paying stocks in the S&P 500 index produced an average annual return of just 4.27% during the 50 years between 1973 and 2023. Dividend payers in the same benchmark index performed more than twice as well by delivering a 9.17% average annual return.
In the second quarter, hedge funds managed by billionaire investors Israel Englander and Igor Tulchinsky bought shares of AbbVie (ABBV -0.59%), a dividend-paying pharmaceutical giant, with both hands. Englander’s Millennium Management fund raised its AbbVie holdings by 682% by acquiring about 854,846 shares. Tulchinsky’s Worldquant Millennium Advisors bought 229,419 shares to open a new position.
With net worth values that exceed $1 billion, Tulchinsky and Englander don’t need to take the same precautions as everyday investors. Let’s weigh some reasons to buy AbbVie against the risks it presents to see if following these billionaires is a smart move for your portfolio.
Reasons to buy AbbVie stock now
AbbVie is a leading pharmaceutical company that markets several increasingly popular drugs with blockbuster sales. For example, Skyrizi is an injection for the treatment of psoriasis, Crohn’s disease, and ulcerative colitis that launched in 2019.
Second-quarter Skyrizi sales rocketed up 45% year over year to an annualized $10.9 billion, and the main U.S. patent that protects Skyrizi’s market exclusivity doesn’t expire until 2033.
AbbVie also has a huge growth driver in Rinvoq. This is a tablet for the treatment of arthritis that launched in 2019, and it’s already generating an annualized $5.7 billion in sales. Qulipta is a pill that the Food and Drug Administration (FDA) approved last year to prevent chronic migraines. Second-quarter sales of the headache-preventing treatment rocketed up to an annualized $600 million in the second quarter and could exceed $2 billion in a couple of years.
AbbVie has raised its dividend payout at a blazing-fast 13.1% average annual rate since spinning off from Abbott Laboratories in 2013. At recent prices, the stock offers a 3.2% yield. With still-young blockbusters like Skyrizi, Rinvoq, and Qulipta pushing up profits, the yield you receive on your original investment could rise a great deal by the time you’re ready to retire.
Reasons to remain cautious
AbbVie raised its dividend payout rapidly in the past, but investors expecting big payout bumps over the next few years could be disappointed. In the first half of 2024, AbbVie reported total sales that grew by just 2.6% year over year.
On its bottom line, AbbVie expects adjusted earnings to land in a range between $10.67 and $10.87 per share this year. The midpoint of this range implies a 3% year-over-year decline.
AbbVie’s former lead product, Humira, delivered $14.4 billion in revenue to the company’s top line last year. Those sales sank to an annualized $11.3 billion in the second quarter of this year because it’s competing with new lower-cost biosimilar versions that entered the U.S. market in 2023.
Humira isn’t the only major blockbuster in AbbVie’s lineup that is losing ground to competition. Imbruvica is a blood cancer drug with second-quarter sales that sank 8% year over year to an annualized $3.3 billion. Imbruvica still has patent-protected exclusivity, but it’s losing ground to Brukinsa, a next-generation drug from BeiGene that works along similar lines.
A buy now?
At recent prices, you can buy AbbVie for about 17.9 times the midpoint of management’s earnings estimate for 2024. That’s a fair valuation if you expect it to repeat its recent performance for several more years.
AbbVie looks like a great stock to buy now because the heaviest losses for Humira and Imbruvica are already in AbbVie’s rearview mirror. Without these headwinds, a return to rapid growth that the market isn’t anticipating could be around the corner.
With Skyrizi and Rinvoq leading the charge, AbbVie’s bottom line and dividend payout could start growing rapidly again in another year or two. Buying some shares now and holding on for the long run looks like a very smart move for everyday investors.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Abbott Laboratories. The Motley Fool has a disclosure policy.
