(Published Jan. 31 by Bob Ciura)
Abbott Laboratories (ABT, Financial) spun off its major pharmaceutical business AbbVie Inc. (ABBV, Financial) in December 2012.
The rationale for the spinoff was that it would allow Abbott to focus on its balanced health care business, which is split among medical devices, consumer products and international pharmaceuticals.
At the same time, Abbott management believed AbbVie, as a growth company, would earn a higher valuation multiple if it were trading on its own.
It is clear that management was right. Since the IPO, AbbVie stock has risen 83%.
By comparison, Abbott is up a more modest 25% in the same time.
Both companies are strong dividend stocks. In fact, Abbott is a Dividend Aristocrat. These are companies in the S&P 500 that have increased their dividends for at least 25 consecutive years.
You can see the list of all 50 Dividend Aristocrats by clicking here.
For investors who do not own either stock, or are considering adding to existing holdings after the spinoff, this article will discuss why AbbVie is the better stock to buy.
Post-split performance
Abbott and AbbVie are of the same origin, but they are much different companies. AbbVie generates 100% of its revenue from pharmaceuticals.
This strategy has worked very well for AbbVie up to this point. The company’s sales and adjusted EPS both increased 12% in 2016.
While AbbVie is a pharmaceutical pure-play, Abbott’s business model is broken up into four operating segments:
- Nutrition (33% of total sales)
- Medical Devices (24% of total sales)
- Diagnostics (18% of total sales)
- Pharmaceuticals (25% of total sales)
Abbott’s businesses enjoy dominant industry positions. For example, Abbott enjoys the number one position in global adult nutrition and U.S. pediatric nutrition sales due to its Ensure and Pedialyte brands.
These top brands provide the company pricing power, which fuels high profit margins in its core nutrition segment.
Source: JP Morgan Healthcare Conference, page 7
Abbott’s diagnostics business has also carved out a leadership position in the health care industry. Abbott has unveiled several new products in recent years.
And, as in the nutrition segment, profit margins in the diagnostics segment have expanded over the past several years.
Source: JP Morgan Healthcare Conference, page 9
The downside for Abbott is that it is not growing at a high rate. In 2016, the company's total sales and EPS from continuing operations rose 2.2% and 2.3% respectively.
AbbVie’s most important pharmaceutical product is Humira, which by itself represents 63% of the company's total revenue.
The problem for AbbVie is that Humira has lost patent protection, meaning it is only a matter of time before biosimilars and generic competition hit the market.
Growth prospects
Going forward, Abbott is looking to medical devices for higher growth. At the same time, AbbVie’s main goal is to replenish its pharmaceutical pipeline to prepare for Humira losing patent protection.
To do this, both companies are looking to generate growth. They have taken different routes to get to this destination.
AbbVie is investing internally in research and development to boost its drug pipeline. This has worked extremely well—AbbVie has eight pharmaceutical products that are cumulatively expected to produce $25 to $30 billion in sales after 2020.
Source: JP Morgan Healthcare Conference, page 13
AbbVie expects several new launches across its portfolio in 2017 and beyond, led by Imbruvica. Sales of Imbruvica more than doubled in 2016 to $1.8 billion.
Source: JP Morgan Healthcare Conference, page 12
Meanwhile, Abbott is looking to grow through acquisition. It recently acquired St. Jude Medical for $25 billion. St. Jude will significantly boost Abbott’s medical devices business, particularly in cardiovascular devices.
Source: JP Morgan Healthcare Conference, page 10
Both companies maintain optimistic growth forecasts going forward. Abbott sees the potential for at least 10% growth in adjusted EPS in 2017.
At the same time, AbbVie expects 10% constant-currency revenue growth in 2017. Furthermore, it sees low double-digit adjusted EPS growth through 2020.
Dividend analysis
At first glance, it might appear as though Abbott is the better dividend stock. After all, it has increased its dividend for 45 years in a row.
But AbbVie’s dividend growth rate in recent years has handily surpassed Abbott’s. For example, it recently raised its dividend by 12%.
Source: JP Morgan Healthcare Conference, page 14
Abbott’s most recent dividend raise was just 1.9%.
This discrepancy has caused AbbVie’s dividend yield to exceed Abbott’s by a wide margin. AbbVie stock now has a 4.3% dividend yield, compared to a 2.6% current dividend yield for Abbott.
Put differently, AbbVie stock offers investors approximately 65% more dividend income each year than Abbott based on their current dividend yields.
This can really add up over time. Consider the resulting impact of yield on cost, which is what an investor currently receives in annual dividend income, as a percentage of the initial investment.
For example, a 10% yield on cost would mean the investor is earning 10% of their original investment each year in dividend income.
Assume AbbVie raises its dividend by 10% each year going forward, a slight decrease from its recent dividend growth rate.
Also assume Abbott raises its dividend by 5% each year.
Under this scenario, AbbVie’s yield on cost would reach 16% in 10 years, assuming reinvested dividends.
Meanwhile, Abbott’s yield on cost would be 5.5% after a decade, including dividend reinvestment.
This shows the impact of AbbVie’s higher dividend yield, and the power of higher dividend growth, over time.
Final thoughts
AbbVie and Abbott are both high-quality businesses. They both have strong brands in their respective categories and leadership positions in their core industries.
As such, they each deserve a place in an income investor’s portfolio for their above-average dividend yields and consistent annual dividend growth. Both are among Sure Dividend’s favorite health care dividend stocks.
While AbbVie is not as diversified as Abbott, its focus has paid off. AbbVie has better growth potential and is increasing its dividend at much higher rates than Abbott. It also has a significantly higher dividend yield.
Therefore, if an investor were to choose between the two, AbbVie is the better stock.
Disclosure: I am long ABT.
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