Can AbbVie regain its status as a top dividend growth stock?

AbbVie (ABBV 0.10%) it has long been a favorite of dividend growth investors, and for good reason. From its spinoff from Abbott Laboratories in 2013, the pharmaceutical titan was a dividend-growth machine, increasing its payout by a staggering average of 13.4% annually in its first decade.

But now AbbVie faces its biggest test yet. Humira, the immunologic juggernaut that once generated about half of the company’s revenue, has lost U.S. patent protection in 2023. As biosimilar competition erodes Humira’s market share, AbbVie’s dividend growth rate has slowed considerably.

Image source: Getty Images.

Can AbbVie Overcome Humira’s Patent Cliff and Reclaim Elite Dividend Growth Stock Status? Let’s look at the numbers and recent developments to see if this pharmaceutical giant has what it takes to return to double-digit dividend growth.

Dividend growth has slowed, but the yield remains attractive

AbbVie’s dividend growth has slowed considerably in recent years. The company’s three-year dividend growth rate is 3.2%, down significantly from its 10-year rate of 10.5%. This slowdown reflects the challenges presented by Humira’s patent expiration and increased competition from biosimilars.

ABBV dividend growth data (yearly) by YCharts

Despite the slowdown, AbbVie’s current dividend yield of 3.19% remains attractive. This yield is slightly above the 3.12% average among its large pharmaceutical and biotech companies. The company’s five-year dividend growth rate of 6.1% compares favorably to the average of 4.45%, underscoring AbbVie’s historical commitment to substantial and regular dividend increases.

Financial health raises concerns

AbbVie’s balance sheet and dividend values ​​paint a worrying picture of dividend sustainability. The company’s debt ratio stands at 10.4, indicating a strong financial position. This level of debt could constrain AbbVie’s financial flexibility and prevent future dividend growth.

Even more alarming is AbbVie’s payout ratio of 216.7%, well above the peer average of 141%. This staggering figure means that AbbVie is currently paying out more than twice its earnings in dividends, a practice that is unsustainable in the long term.

Historically, companies with payout ratios exceeding 75% have been at greater risk of dividend cuts or suspensions. However, AbbVie’s 52-year-long streak of consecutive dividend increases, which stems from its previous association with Abbott Laboratories, implies that a cut is unlikely in the near term.

However, dividend investors should monitor these indicators of financial health, as they could signal trouble for future dividend growth.

The immunology franchise is showing strength

While AbbVie faces challenges related to Humira’s patent expiration, its next-generation immunology drugs are performing exceptionally well. Skyrizi and Rinvoq demonstrate robust growth with net revenue operating increases of 45.6% and 59.2%, respectively, in the most recent quarter. These drugs effectively offset the decline in sales of Humira, which fell 29% globally during the same period.

The strong performance of Skyrizi and Rinvoq suggests that AbbVie has viable successors to Humira in its portfolio. Management said these two drugs should generate combined sales of approximately $27 billion in 2027. If achieved, this sales target would provide a solid foundation for future revenue growth and provide critical support to its program of dividends in this difficult period.

Strategic acquisitions boost the drugmaker’s prospects

AbbVie’s recent acquisitions highlight its commitment to long-term growth. The recent $8.7 billion acquisition of Cerevel Therapeutics strengthens AbbVie’s neuroscience pipeline with multiple clinical and preclinical stage candidates targeting schizophrenia, Parkinson’s disease and mood disorders.

Moreover, the acquisition of cancer specialist ImmunoGen accelerates AbbVie’s entry into the solid tumor space and adds Elahere, a first-in-class antibody-drug conjugate approved for platinum-resistant ovarian cancer. These strategic moves diversify AbbVie’s portfolio and could significantly increase earnings power in the second half of the decade.

Wall Street is taking a cautious stance

Wall Street’s assessment of this immunology titan suggests a mix of caution and potential opportunity. AbbVie shares currently trade at 14.2 times estimated 2026 earnings, a modest discount from the top biotech average of about 15 times forward 2026 earnings.

This conservative valuation indicates that the market is not completely sold on AbbVie’s post-Humira growth strategy. The stock appears to be in “prove” mode, with investors waiting to see how well the company navigates Humira’s patent cliff.

For contrarian investors, this cautious market sentiment could represent an attractive entry point, provided AbbVie can continue to successfully execute its post-Humira strategy.

Can AbbVie return to form as a top dividend growth play?

AbbVie’s dividend growth has undoubtedly slowed, and its financials raise valid concerns. However, the company’s robust pipeline and strategic acquisitions provide compelling reasons for optimism. The impressive performance of Skyrizi and Rinvoq in offsetting Humira’s decline demonstrates AbbVie’s innovative prowess and ability to create long-term shareholder value.

While uncertainty remains, AbbVie appears well-positioned to return to double-digit dividend growth over the next two years. This promising outlook speaks volumes for management’s adept handling of one of the industry’s most closely watched patent expirations.

The bottom line is that the drugmaker has what it takes to overcome these challenges and reestablish itself as a top-tier dividend stock. So despite the recent dip in dividend growth, savvy investors with a long-term outlook may want to use this period of weakness to build a position in dividend power.