AbbVie Inc. ( NYSE: ABBV ) recently catered, as modest yearly gains almost got wiped out in a single session. Meanwhile, downward pressure continues as the price looks to test the support around US$100 for the third time this year.
We will examine the dividend as the stock dips down below the P/E of 30 since a 4.8% yield is certainly interesting at the right price.
It is no secret that regulators make or break the markets, but few sectors are under their power as much as the Pharmaceuticals. A recent decision by the Food and Drug Administration (FDA) had a severe negative impact on the share price. The FDA added new and updated warnings on drugs, including Rinvoq(upadacitinib) that AbbVie markets.
Multiple analysts, including those from J.P Morgan and Citi, called this move exaggerated, yet the stock doesn't show signs of bottoming just yet.
Meanwhile, BTL Industries announced a resolution in the patent infringement claims against AbbVie related to their muscle stimulation technology. Per the agreement, AbbVie will pay an undisclosed sum, and all litigation pending between the parties will be dismissed.
With a nine-year payment history and a 4.8% yield, many investors probably find AbbVie intriguing.We'd agree the yield does look enticing.
Dividends are typically paid from company earnings. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of its net income after tax.AbbVie paid out 136% of its profit as dividends over the trailing twelve-month period. However, given the circumstances of 2020, this should not be a surprise.
We also measure dividends paid against a company's levered free cash flow to see if enough cash was generated to cover the dividend.AbbVie paid out a conservative 45% of its free cash flow as dividends last year.
It's good to see that while profits did not cover AbbVie's dividends, at least they are affordable from a cash perspective.If executives continued paying more in dividends than the company reported in profits, we'd view this as a warning sign.Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
We update our data on AbbVie every 24 hours, so you can always get our latest analysis of its financial health here.
One of the major risks of relying on dividend income is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty.
The first recorded dividend for AbbVie, in the last decade was nine years ago.Its dividend has not fluctuated much that time, which we like. Still, we're conscious that the company might not yet have a track record of maintaining dividends in all economic conditions.
During the past nine-year period, the first annual payment was US$1.6 in 2012, compared to US$5.2 last year.This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time.
The dividend has been growing quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) grew, as this is essential to maintaining the dividend's purchasing power over the long term.
AbbVie's earnings per share have been essentially flat over the past five years.Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation.
Still, the company has struggled to grow its EPS and currently pays out 136% of its earnings. As they say in finance, ' past performance is not indicative of future performance.' Still, we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.
3 attributes make a good dividend: affordability, consistency, and growth.
We're not keen on the fact that AbbVie paid out such a high percentage of its income - even though we note that the circumstances were extraordinary.
Unfortunately, there hasn't been any earnings growth, and the company's dividend history is shorter than the 10 years we ideally like to see before making a strong judgment.While we're not hugely bearish on it, overall, we think there are potentially better dividend stocks than AbbVie out there.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analyzing a company. Taking the debate a bit further, we've identified 4 warning signs for AbbVie that investors need to be conscious of moving forward.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.