Should you buy this Blue Chip Biotech share?
This is arguably the most difficult time for an income investor in decades. On the one hand, the S&P 500 returns less than 1.3%, which is very close to its all-time low of 1.1% in 2000. At the same time, the annual inflation rate of 6.2% last month hit a 31-year high. Anyone sitting on cash and waiting for a market correction is like watching your money soar as your capital loses purchasing power. So what should an income investor do?
Fortunately, there are still some viable, high yielding options that income investors can consider. Let’s take a look at three reasons why pharmaceutical stocks AbbVie (NYSE: ABBV) could be one of those options.
AbbVie consistently exceeds expectations
When AbbVie released its third quarter results on October 29, the company managed to beat non-GAAP analyst earnings and earnings per share (EPS) estimates for the 11th consecutive quarter. The company posted third-quarter revenue of $ 14.34 billion, equivalent to a growth rate of 11.3% compared to the same period last year. That’s what led AbbVie to beat analysts’ forecast of $ 14.3 billion in third-quarter revenue by 0.3%.
AbbVie’s largest segment, the immunology segment led by Humira, followed by Skyrizi and Rinvoq, contributed 60.5% of total revenue growth in the third quarter. Humira’s revenue grew 5.6% year-over-year to $ 5.43 billion in the third quarter, contributing nearly one-third (32.2%) of the revenue growth in AbbVie’s immunology segment in the third quarter.
Without a doubt, AbbVie’s most encouraging third quarter result is that its next-generation immunology drugs Skyrizi and Rinvoq saw their combined revenue increase 92.2% to $ 1.25 billion. This represented the remaining 67.8% of the growth in the immunology segment. And before Humira’s US patent expires in 2023, Skyrizi and Rinvoq’s overall share of immunology segment revenue increased from 11.2% to 18.7% in the third quarter.
Overall, AbbVie appears well positioned to rebound strongly after Humira’s imminent loss of exclusivity in the United States via Skyrizi, Rinvoq and other drugs such as the antipsychotic Vraylar, which increased its revenue. third-quarter 29% year-over-year to $ 461 million. That’s why analysts predict that AbbVie will show annual adjusted EPS growth of 4.5% over the next five years despite the fall in Humira’s patents. AbbVie reported third quarter adjusted EPS of $ 3.33, representing a growth rate of 17.7% from the previous year. It also beat analyst consensus of $ 3.22 in third quarter adjusted EPS by 3.4%.
AbbVie’s strong performance in the third quarter and year-to-date prompted the company to slightly raise its midpoint forecast for Adjusted EPS for this year, from $ 12.57 to $ 12.65. The updated mid-term forecast for this year would be a 19.8% year-over-year growth rate in adjusted EPS from the $ 10.56 reported last year. These encouraging prospects help to explain why the board of directors of the company announced a sharp increase of 8.5% of its quarterly dividend as of the dividend paid next February.
A fair and improving balance sheet
AbbVie is a growing company, which is important for dividend growth investors. But does the company have a sufficiently healthy balance sheet to pay its dividend during a temporary drop in profitability? Let’s turn to the interest coverage ratio to answer this question, which measures the ease with which a company can meet its interest expense obligations with its earnings before interest and taxes (EBIT).
Its interest coverage ratio fell from four in the first nine months of last year ($ 6.57 billion in EBIT / $ 1.66 billion in interest expense) to 5.8 over the course of the last year. the first nine months of this year ($ 10.53 billion EBIT / $ 1.81 billion interest expense). This demonstrates that the company continues to move in the right direction in integrating Allergan’s assets into its business after the acquisition closes in May 2020.
A blue chip at an attractive price
Even though AbbVie’s fundamentals seem solid, the stock is strongly discounted by the market. Primarily motivated by concerns over the cliff of Humira’s US patents which I think are exaggerated based on Skyrizi and Rinvoq’s huge growth trajectories.
In fact, AbbVie’s forward P / E ratio of 8.4 at its current price of $ 116 per share is much lower than the drugmaker’s average forward P / E ratio of 11.3. This gives income investors a chance to pick up AbbVie shares and its well-hedged 4.5% return before the market warms up and puts it to a higher valuation multiple.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.