Here’s Why This Dividend King Is a Buy – The Motley Fool

Mounting concerns over the state of the global economy have pushed stocks to their lowest levels of the year. Accordingly, the S&P 500 index has plunged 23% so far this year.But one sector of the market is holding its own in this downward cycle.

Many pharma stocks have squeezed out marginal gains in their share prices in 2022. Among the most notable stocks to do so, AbbVie (ABBV 0.94%) is actually trading up 6% on the year. And this strong performance looks set to continue for a few reasons.

AbbVie is best known as the maker of the top-selling drug in the world, Humira. This immunology medicine will likely face competition in 2023 in the U.S. from biosimilars, so the company has been hard at work building its next generation of blockbuster drugs. Besides Humira, AbbVie's portfolio includes 11 other drugs likely to generate at least $1 billion each in net revenue for 2022.This stacked lineup of products explains how the drugmaker's net revenue increased 4.5% year over year to $14.6 billion in the second quarter.

The two drugs most instrumental to its revenue growth come from its immunology segment. Skyrizi recorded $1.3 billion in net revenue during the quarter, a staggering 85.9% growth rate year over year. The increase is attributed to approval in January from the U.S. Food and Drug Administration (FDA) for the drug to treat patients with psoriatic arthritis. Annualized, this new use case could provide a $1.1 billion boost to AbbVie's annual net revenue.

Arthritis medication Rinvoq's net revenue in Q2 soared 56.3% year over year to $592 million. This was the result of the FDA's green light in March for the medicine to treat patients with ulcerative colitis. This new use could add $400 million in annual net revenue for the pharma company.

AbbVie reported $3.37 in non-GAAP (generally accepted accounting principles) diluted earnings per share (EPS) in the second quarter, which was up 11.2% year over year. As a result of its higher net revenue base and tight cost management, the company's non-GAAP net margin increased 460 basis points over the year-ago period to 47.6% during the quarter. This is how AbbVie's adjusted diluted EPS growth was significantly higher than its net revenue growth for the quarter.

Thanks to the company's pipeline of nearly five dozen molecules currently in clinical development, AbbVie has plenty of potential new drugs to help it keep growing over the medium term.

Image source: Getty Images.

AbbVie's strong performance allows the company to generate enough free cash flow to support a generous dividend which yields 3.9%, more than twice the S&P 500's average yield of 1.8%. The dividend is sustainable and has room to run higher.

AbbVie's dividend payout ratio will be about 41% in 2022 if earnings projections hold true. That should allow the company enough funds to make further acquisitions and shore up its drug portfolio and pipeline as well as repay debt to strengthen its balance sheet. It should also give AbbVie some breathing room to maintain its dividend in 2023 when profits are likely to dip a bit over the aforementioned rise in U.S. Humira competition.

AbbVie has only been in existence as an independent company since 2013 (it was spun off from Abbott Laboratories (ABT 0.29%)). But because of how the spin-off was handled (with AbbVie maintaining a dividend), AbbVie was able to maintain its streak of consecutive annual dividend increases. That allowed it to be recognized this year as a Dividend King (along with Abbott Labs). Both companies effectively reached 50 consecutive years of payout raises (the main requirement to become a Dividend King) this year. That growth consistency points to the stability and strength of AbbVie's dividend.

AbbVie is going to have a hard time replicating the success of Humira with just a single new drug. But the company expects more than $15 billion in combined net revenue from Skyrizi and Rinvoq by 2025, so there is reason to AbbVie can keep its growth going. And with the trailing-12-month (TTM) dividend yield of 3.9% hovering near the 10-year median TTM dividend yield of 3.85%, the market thinks the stock is trading at a fair price. This makes AbbVie a solid buy for income investors and value investors.

Kody Kester has positions in AbbVie. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Here's Why This Dividend King Is a Buy - The Motley Fool