I recently bought shares of seven different companies. One of those companies was AbbVie (NYSE: ABBV). I had different reasons for buying each of the stocks. Some were in sectors in which I didn't already have much exposure in my portfolio. That wasn't the case with AbbVie, though. I already owned quite a few healthcare stocks and exchange-traded funds (ETFs).
Continue Reading Below
AbbVie was unique. There wasn't just one primary reason the stock caught my attention. Instead, multiple factors influenced my thinking. Here's why I bought AbbVie stock -- and why you might want to consider the biotech stock, too.
Image source: Getty Images.
Compelling growth story
I like growth. Period. End of story.
What I really like about AbbVie was that it has grown revenue and earnings at a solid pace -- and it's not even close to the end of the story for the company's growth. AbbVie projects double-digit percentage annual adjusted earnings per share growth through 2020.Wall Street agrees, with the consensus estimate among analysts predicting average annual earnings growth of more than 14% over the next five years.
The question I had to ask before buying AbbVie, though, was this: Are those solid growth projections realistic? My conclusion was that they were.
AbbVie lays claim to Humira,the top-selling drug in the world. The autoimmune disease drug generated revenue of more than $16 billion last year, a year-over-year increase of nearly 15%. That growth rate seems likely to taper off, but I think Humira should still pull in over $18 billion in sales by 2020.
Humira won't be the real growth driver for AbbVie in the coming years, however. Cancer drug Imbruvica made $1.8 billion in 2016 and could reach sales of $5 billion by 2020. Another new cancer drug, Venclexta, should generate at least $1.5 billion in annual sales within the next few years.
I expect AbbVie to launch two drugs with huge potential in 2018. The company plans to file for approval for elagolix in treating endometriosis and for Rova-T as a third-line treatment for small cell lung cancer this year. Both drugs appear to have great chances for approval.
The company's autoimmune franchise could also be bolstered the following year if all goes well. ABT-494 is on track to hit the market in 2019 in treating rheumatoid arthritis. Risankizumab could be launched the same year as a treatment for psoriasis.
Ability to make more aquisitions
Many of AbbVie's promising drugs and pipeline candidates came from acquisitions. The company's 2015 buyout of Pharmacyclics allowed it to pick up Imbruvica. AbbVie's purchase last year of Stemcentrx brought Rova-T into the company's pipeline. I think the biotech is in good position to make even more acquisitions -- and fuel more growth.
AbbVie reported cash, cash equivalents, and marketable securities totaling just under $8 billion at the end of the third quarter. That amount by itself is enough to buy one of a number of smaller biotechs with experimental drugs that could become winners.
Even better, though, is that AbbVie is on track to generate annual operating cash flow topping $7 billion. The company could finance an even larger acquisition if it wanted to do so.
What I really like about AbbVie's cash flow is how the company uses it to reward shareholders. AbbVie claims one of the strongest dividends around. Its dividend yield currently stands at 4.24%.
There's no doubt whatsoever that AbbVie places a high priority on keeping the dividends flowing. The company has grown its dividend by 60% since it was spun off by Abbott Laboratories in 2013.
AbbVie appears to be in great shape to continue that trend. The company uses around 60% of its earnings to fund dividend payouts now. With the likelihood of solid earnings growth over the next few years, AbbVie shouldn't have any problems keeping its streak of dividend hikes going.
Weaknesses and threats
Only looking at a company's strengths and opportunities before buying its stock can lead to bad decisions. I also reviewed AbbVie's weaknesses and potential threats before buying the biotech's shares.
The biggest weakness for AbbVie is directly related to its biggest threat. AbbVie relies on Humira to generate over three-fifths of its total revenue. Humira faces significant threats from biosimilars. While AbbVie is using the legal system to fend off these biosimilars from reaching the market, it's only a matter of time before the floodgate opens.
I bought AbbVie fully aware of the company's greatest weakness and threat. Why? I think it will be a few years before the problems hit in full force. In the meantime, AbbVie should continue to grow with great new drugs like Imbruvica and Venclexta. It should be in position to make even more acquisitions. And it should keep paying a very attractive dividend.
AbbVie might not be a stock to buy and hold forever. But it looks like a smart pick for the next few years. That's what I'm counting on.
10 stocks we like better than AbbVieWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now and AbbVie wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017