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AbbVie's (NYSE: ABBV) share price has grown by a compound annual growth rate (CAGR) of more than 15% since the company was spun off from Abbott Labs. But investors didn't see that kind of return in 2018, with AbbVie stock falling 5%. So far, AbbVie's performance this year has been even worse.
But there's a simple way that you could make a 10% return each year with AbbVie. And you can do so regardless of how well the stock performs. Sound too good to be true? It isn't.
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Two simple steps
To obtain a steady 10% annual return from AbbVie requires only two simple steps. First, you have to buy the stock now. Second, you have to sit back and wait around seven years. At the end of the period, you'll probably have 10% returns on your initial investment for a long time thereafter no matter how AbbVie stock fares along the way.
One key ingredient to this strategy is AbbVie's dividend. Although the big drugmaker's dismal stock performance recently has been disappointing to shareholders, it's helped boost AbbVie's dividend yield to a mouthwatering 5.15%.
The other key ingredient is AbbVie's commitment to increasing its dividend payout. Including AbbVie's time as part of Abbott, the company has increased its dividend for 47 years in a row. Since its spinoff from Abbott in 2013, AbbVie has raised its dividend by a total of 168%. That translates to a compounded annual yearly dividend increase of around 15%.
If AbbVie continued to raise its dividend by 15% each year, the dividend yield would double to 10% in less than five years. However, the company's most recent dividend boost of 11.5% was a little less than its average. Even if AbbVie only increases its dividend by 10% each year, you'd only have to wait seven years for the dividend to double and provide an annual return of 10% on your initial investment.
Realistic assumption?
There's a huge assumption in this simple strategy: AbbVie has to keep growing its dividend. How realistic is that assumption?
I don't see any problem with AbbVie's ability to double its dividend over the next seven years. First of all, AbbVie currently only uses 44% of operating cash flow to fund its dividend program. That gives the company flexibility to increase its dividend even if earnings and cash flow don't increase.
The good news is that earnings and cash flow almost certainly will increase. Some investors might be concerned about sales declines for AbbVie's top-selling drug, Humira, now that there's biosimilar competition in Europe. However, Humira's European sales won't evaporate. More importantly, more than two-thirds of the drug's total revenue is made in the U.S., where there isn't likely to be any direct biosimilar competition until 2023.