AbbVie (NYSE:ABBV) stock is cheap and has a very attractive prospective dividend yield. In addition, this pharmaceutical company’s growth prospects are high. As a result, ABBV stock is likely worth significantly more than the price of $107.73 as of Sept. 17.
ABBV is basically flat for the year, as it closed 2020 at $107.15. But this is after it rose to a peak closing price of $120.78 on Aug. 31. Since then, the stock has fallen by about 10.8%.
The reason behind the move is that the FDA now requires AbbVie’s RINVOQ, one of its blockbuster arthritis drugs, to have a heart-related event risk label put on the dispensing bottles. This could eventually lower sales of the drug.
That’s the Bad News. Here is the Good News.
However, AbbVie is now in a good position for many value investors to buy its shares. One reason is that the company is likely to announce an increase in its dividend per share next month, based on its historical patterns.
For example, on Sept. 10, AbbVie just declared a $1.30 per share quarterly dividend payment. But it typically announces a higher payment for the next 12 months at the end of October or the first week of November.
For example, on Oct. 30, 2020, AbbVie declared a dividend per share (DPS) of $1.30, which was 10.2% higher than the previous quarterly DPS of $1.18 declared on Sept. 11, 2020. This $1.30 payment was declared for 4 four quarters and now the next dividend declaration is likely to be 10% higher. This implies that by Oct. 30, it could announce a DPS of $1.43 per share.
Dividend Per Share Growth
That makes ABBV stock quite valuable. For one, its prospective annualized DPS of $5.72 represents a dividend yield of 5.3% on today’s price of $107.73 per share.
For another, this confirms that the company is consistently growing its dividend. For example, Seeking Alpha reports that its three-year history of dividend hikes average more than 15.8% annually and more than 18% annually over the past five years.
Moreover, the dividend is likely to be well-covered by prospective earnings. Analysts foresee the company making $12.61 in 2021 and $13.83 in 2022. This is according to 20 analysts’ reports surveyed by Seeking Alpha. It also means that the 2022 dividend will be more than 150% covered by prospective earnings per share (EPS).
Valuing ABBV Stock with Dividend Yields and P/E
One way to value the stock is to compare its present dividend yield to its historical yield. For example, in the past four years, ABBV stock has had an average dividend yield of 4.43%, much lower than today’s 5.3% dividend yield using the forecast higher DPS of $5.72.
Therefore, in order to value ABBV stock using its historical dividend yield, we divide the $5.72 DPS by 4.43%. That equals $133.02 per share and implies ABBV stock is worth 23.5% more than its Sept. 17 price of $107.73.
Another way to measure its value is to compare the forecast earnings per share (EPS) with its historical price-to-earnings (P/E) ratio. Now that AbbVie has completed its acquisition of Allergan, it is not as reliant on its arthritis drug, Humira. Therefore, the bad news from the FDA won’t impact its EPS as badly as it would have before the acquisition.
Morningstar indicates that AbbVie’s 5-year average forward P/E ratio is 10.4x. So if we multiply its 2022 EPS estimate of $13.83 by 10.4, the resulting price target is $143.83 per share. This represents an upside of 33.5% over today’s price.
Therefore, the average of the historical dividend yield model of $133.02 and the historical P/E model of $143.83 is $138.43. That represents an upside of 28.5% over today’s price.
What to Do With ABBV Stock
AbbVie is likely to see good news with a higher dividend per share declaration next month. Once the market realizes the company’s earnings are not going to trend down to zero, it could rise to $138.43.
ABBV stock is at a trough now. It probably makes sense for value investors to either take a new position or average down into their existing holdings. They can rest assured that historically, the stock is worth considerably more.
On the date of publication, Mark R. Hake did not have a position in any security (directly or indirectly) mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.