AbbVie (ABBV) bounced off recent lows following a quarterly dividend announcement. At below $68, the stock pays a dividend of over 6%.
Although its Allergan (NYSE:AGN) is expensive, unproven, and may distract the company, the acquisition shores up free cash flow generation and strengthens the drug portfolio.
Income investors should consider only AbbVie as the drug manufacturing stock to hold. The stock trades at a forward P/E of around seven times.
Those who buy the stock by Oct. 15 will get paid the $1.07 a share quarterly dividend. In its next dividend announcement in January, expect the company to raise the payout.
Management is handling the debt very well. Current revenues cover debt obligations. Once the Allergan deal closes and AbbVie adds more debt, cash flow from Allergan will cover the higher debt costs.
In the near-term, markets may keep ABBV stock trading at the lows, due to uncertainties from the Allergan deal. And even if it does not raise the dividend in January, conserving cash to buy back more shares or to reduce its debt will benefit shareholders.
The stronger the revenue growth, the more confident investors become for AbbVie’s medium-term prospects.
A dividend discount model suggests that AbbVie Stock is worth $69 in the base case.
Disclosure: Author owns shares of AbbVie.
