This 5% Yielding Defensive Dividend Aristocrat Could Double Your Money Over The Next Few Years

This 5% Yielding Defensive Dividend Aristocrat Could Double Your Money Over The Next Few Years

Posted On June 19, 2020 4:06 am

AbbVie (ABBV) is one of my favorite defensive dividend aristocrats right now and here’s why.

Bullish Thesis

AbbVie’s Allergan acquisition is now closed and the result is not just one of the fastest-growing drug makers in America, but one of the best-growing companies of 2020.

  • 2020 analyst EPS growth consensus: +16%
  • 2021 analyst consensus: +15%
  • 2022 consensus: +12%

Even factoring in the loss of Humira exclusivity in 2023, Reuters reports that the eight analyst long-term growth consensus is 10.3% CAGR.

For context, 6.4% CAGR is what the S&P 500’s earnings are likely to grow at in the coming years.

In other words

  • 2.5%X the safe yield of the S&P 500
  • about 66% faster growth
  • 34% undervalued vs 23% to 50% overvalued for the S&P 500

Risks To Consider

Similar to other drug firms, AbbVie faces the risks of new drug failures, reimbursement challenges for new drugs, and drug pricing cuts by large payer groups that are growing increasingly price-sensitive. Further, AbbVie’s high concentration of Humira sales makes the company significantly exposed to any new competitive threats to Humira, both from biosimilars and new branded drug competition.

Also, AbbVie has taken on significant debt to purchase Allergan, but we expect robust cash flows will help manage the heavy debt load. Overall, we view the firm at a medium uncertainty level.” – Morningstar

Valuation/Total Return Profile

  • 2020 average historic fair value: $142
  • current price: $96
  • discount: 32%
  • potential good buy price: $121
  • Dividend Kings rating: potentially strong buy

ABBV 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

ABBV 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

These are the kinds of returns ABBV could generate if it grows as expected and returns to historical fair value. How likely is ABBV to grow as analysts expect?

Since its spinoff, the company has a good track record of meeting and usually beating two-year forecasts.

Putting It All Together: Why ABBV is A Potentially Good High-Yield Investment Right Now

I base all my investing decisions based on the three priorities of long-term income investing.

  • ABBV’s BBB+ stable credit rating from S&P implies about 5% 30-year bankruptcy risk, earning it 4/5 on preservation of capital.
Credit Rating 30-Year Bankruptcy Probability
AAA 0.07%
AA+ 0.29%
AA 0.51%
AA- 0.55%
A+ 0.60%
A 0.66%
A- 2.5%
BBB+ 5%
BBB 7.5%
BBB- 11%
BB+ 14%
BB 17%
BB- 21%
B+ 25%
B 37%
B- 45%
CCC+ 52%
CCC 59%
CCC- 65%
CC 70%
C 80%
D 100%

(Sources: Dividend Kings Investment Tool, S&P, The University of St. Petersberg)

ABBV Dividend Return Potential 

5-Year Estimated Dividend Return (% of your investment) ABBV
Current Yield 4.9%
Long-Term Analyst Growth Consensus (Column AH in valuation tool, also in Research Terminal Lists) 10.3%
Yield On Cost in 5-Years 8.0%
Average 5-Year Consensus Yield 6.6%
5-Year Estimated Dividend Return 32%
S&P 500  11%

(Sources: Dividend Kings Investment Tool)

ABBV Probability-Weighted Expected Return 

Mid-Range Probability-Weighted Return Potential ABBV
5-Year Consensus Annualized Total Return Potential 15.2%
Conservative Margin Of Error Adjusted Annualized Total Return Potential 7.8%
Bullish Margin Of Error Adjusted Annualized Total Return Potential 23.0%
Conservative Probability-Weighted Expected Annualized Total Return 4.7%
Bullish Probability-Weighted Expected Annualized Total Return 18.4%
Mid-Range Probability-Weighted Expected Annualized Total Return Potential 12%
S&P 500 1%

(Sources: Dividend Kings Investment Tool)

S&P 500 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

Compared to the paltry expected returns of the extremely overvalued broader market, ABBV scores 5/5 on return on capital potential.

S&P 500 Valuation Matrix 

Year EPS Consensus YOY Growth Forward PE Blended PE Overvaluation (Forward PE) Overvaluation (Blended PE) Consensus CAGR Return Potential By End of That Year Upside Potential By End of That Year
2020 $125.48 -23% 24.8 21.5 52% 26% -48.9% -30.3%
2021 $164.00 30% 19.0 21.5 16% 26% -5.4% -8.2%
2022 $186.58 13% 16.7 21.5 2% 26% 2.7% 6.9%

(Sources: Brian Gilmartin, F.A.S.T Graphs, FactSet Research, Reuters’)

ABBV Decision Matrix

Goal ABBV Why Score (Out of 5)
Preservation Of Capital Above-Average 5% long-term bankruptcy risk (BBB+ credit rating) 4
Return Of Capital Above-Average 32% of capital returned over the next 5 year via dividends vs 12% S&P 500 4
Return On Capital Excellent 12% PWR vs 1% S&P 500 5
Relative Investment Score 87%
Letter Grade B+ (good)
S&P 73/100 = C

Relative to the S&P 500 ABBV is a potentially good investment decision today, courtesy of a 5% safe yield, that’s likely to grow at a rapid pace in the coming years, returning nearly a third of your investment in dividends.

It’s also capable of about 12X the total returns of the broader and extremely overvalued market.


About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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