AbbVie’s (NYSE:ABBV) recent bounce from the $65 level is a welcome relief for suffering value investors. Despite a dividend that is yielding over 6%, the stock is underperforming.
Its acquisition (pending) of Allergan (NYSE:AGN) will fund itself while broadening its product portfolio.
AbbVie is underperforming because drug stocks are out of favor and value investors shy away from it. And consumer groups and unions urging the FTC to block the deal may undue the heightened risks.
If AbbVie does abandon the deal, it would remove acquisition risks hurting the stock price. AbbVie can still survive and thrive in the years ahead with Humira generics on the way. It has a deep pipeline of drugs even without Allergan.
Taking on the added debt could stress the business. But lower interest rates weaken that argument and support the view that leveraging the balance sheet will pay off.
Historically, AbbVie’s management proved itself with past acquisitions, so adding Allergan should pay off in the long term. The company assured shareholders that it will not cut its dividend. And, increasing it will please income investors who want to hold AbbVie passively for the next few years.
Takeaway
AbbVie stock is attracting buyers again which could lift the stock back to the $80 level. At a forward P/E of 7.5 times, the stock is cheap at current levels and still inexpensive if it rises 10-20% higher from current levels.
Disclosure: Author owns ABBV stock.
