ABBV dividend safety – Is the dividend safe?

This article will look at a few key metrics along with future growth prospects to determine ABBV dividend safety. ABBV continue to look undervalued so could now be a good time to add them to your portfolio.

Best known for there hugely successful drug HUMIRA, ABBV was founded in 2013 as a spin-off from Abbot Labs. They qualify as a Dividend Aristocrat under the parent company. I’m not fond of this rule, but it shows that the company has a dividend paying culture at its core. They have a strong presence here in Ireland with over 600 employees across 3 different counties. AbbVie is probably .

But with EU patent protections expired and US patent protections running out by 2023. The Question of a ABBV dividend safety remains. Can they continue to increase dividends over the next 10 years?

Payout Ratio

One of the first metrics I look at for ABBV dividend safety is the payout ratios. We look at both the earnings payout ratio and the free cash flow payout ratio. I like to see both ratios under 70% but I put more weight on the free cash flow ratio. The reason is that earnings can be affected negatively or positively by once-off events. I check at least 5 years to see a better reflection of the earnings power of a company.

Earnings payout ratio

The earnings payout ratio is calculated as Dividends Per Share / Earnings Per Share. This tells you what percentage of the company’s EPS is being used to fund the dividend. The lower the percentage, the more chance a company will likely keep increasing the dividend.

In 2019 the EPS Payout ratio was 81%. The 5-year average is 77.34% which is a little high for my liking. However if earnings is growing at a faster pace than dividend growth it may not be a huge problem. The trailing twelve month EPS coverage currently stands at 97.09% due to negative impacts from COVID-19

Free Cash Flow payout ratio

I personally put more weight on the payout ratio that is calculated from cash flow. The FCF payout ratio is calculated as Total Dividends / Free Cash Flow. This tells you what percentage of the company’s free cash flow is being used to fund the dividend. The lower the percentage, the more chance a company will likely keep increasing the dividend.

In 2019 the payout ratio was 50% and the 5-year average is 47%. Free cash-flow has grown from $7 billion in 2015 to $12 billion in 2019. Later I will check the FCF growth to ensure that there is still room to continue to increase the dividend.

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Interest Coverage

Debt is an important metric for ABBV dividend safety. Interest coverage is probably one of the most important metrics that I use. The more debt a company has than the greater the amount of interest they have to pay. This can have a huge burden on cash flow which in turn may affect the cash left over to pay a dividend.

The Interest coverage ratio is calculated as EBIT/Interest Expense. This is essentially the number of times a company can pay its interest with its earnings before interest and taxes. I prefer the number to be above 3 or the industry average but the higher the number the better.

ABBV has an interest coverage ratio of just above 10 which is very high. This is also higher than the industry average of -9.43.

Debt/Equity

The debt to equity ratio is a common financial leverage ratio that represents the amount of debt and equity that is used to finance a companies assets. A high percentage of debt in relation to equity is usually a red flag for me.

It is calculated by dividing a firm’s total liabilities by total shareholders’ equity.

ABBV has a negative debt to equity which means that it is a highly leveraged company. This is not ideal but can be forgiven if a company is consistently growing its profits, But it can be worrying during a downturn. The leverage, in this case, is deemed to be sustainable as the interest coverage is above 10.

Earnings Growth

When considering dividend safety, I like to look at the earnings trend over a 5 and 10 year period. I prefer to see earnings growth in line with the dividend growth which ensures that there will be plenty of room to keep growing the dividend.

Earnings over 5 years have grown at a compound annual growth rate of 36.80%. With revenue and Earnings growing, it shows the potential to keep increasing the dividend in the future.

Free Cash Flow Growth

Similar to earnings growth, FCF growth shows how a company has been increasing its cash flow. In the same manner that the free cash flow payout ratio is important, Free Cash Flow growth gives us an idea if a company can continue to meet the existing dividends and support further increases in the future.

Over the last 5 years the free cash flow has grown from $7 Billion to $12.77 Billion which is a growth rate of 12.8%

Dividend Growth

Just because a company has historically paid a dividend, does not mean that it will continue to pay them in the future. However it is quite likely that a company that has dividend aristocrat status will continue to keep increasing dividends if they have the means to do so.

I love to see a chart like this where there is consistent growth with the dividend but only if earnings and cash flow are consistent also. The 5-year Dividend Growth Rate is 20.86% which is below the 36.80% earnings growth rate but above the free cash flow rate.

Over a long period of time, if dividends continue to outpace the free cash flow then it may have an impact on the dividend.

Future Growth

One of the major risks for pharma companies is patent loss. This is a rel concern for AbbVie as their patent protections will run out by 2023 on their flagship HUMIRA product. HUMIRA is a biologic therapy administered as a subcutaneous injection. It is approved to treat the following autoimmune diseases in the United States, Canada and Mexico and in the European Union.

Humira has generated 45% of the revenue in the first 3 Quarters of 2020. However there was a decline in the revenue from Europe due to price cuts due to the patent protection running out in europe.

This is a trend I would expect to happen in 2023 throughout the US. To combat this, ABBV have been investing heavily in R&D in the Hematologic Oncology section which is showing huge solid growth.

“We continue to be very well positioned for the long-term. Results from key growth products – including Skyrizi, Rinvoq and Ubrelvy – continue to track ahead of our expectations, our aesthetics portfolio is demonstrating a strong V-shaped recovery, our hematologic-oncology franchise is delivering double-digit growth and we’re advancing numerous attractive late-stage pipeline programs,

Richard A Gonzalez – AbbVie CEO

Another major growth driver is the $63 Billion acquisition of Allergen which was finalised in May 2020. AbbVie is updated its adjusted diluted EPS for the full-year 2020 from $10.35 to $10.45 to $10.47 to $10.49, which includes the results of Allergan from May 8, 2020 through December 31, 2020, representing annualised net accretion from the Allergan transaction of 12 percent. This acquisition should reduce the burden on HUMIRA in terms of the revenue percentile over the next couple of years.

Conclusion

Based on my scoring system I decide how likely I believe a dividend cut may be. A low score does not mean there will be a dividend cut but it gives me a warning signal to suggest that ABBV dividend safety could be at risk.

My scoring system is as follows:

Based on the quick analysis above ABBV scored a total of 82 out of 100 which means I believe they are a low risk to cut the dividend.

While the patent protection will result in a loss of revenue for ABBV, they have been working hard in R&D to build products that can help offset the loss of revenue. The Acquisition of Allergan is also positive and shows that the company are moving in the right direction. ABBV show very strong signs that they can and will continue to raise their dividend in the future.

I estimated the companies fair value to be around $130 using a DDM and DCF model which means that at today’s current price they could undervalued.

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