AbbVie (NYSE: ABBV) is a leading pharmaceutical company that rewards its shareholders with a generous dividend policy. The company has a history of increasing its dividends for more than 50 years in a row, earning it the status of Dividend King. AbbVie also sports one of the highest dividend yields within its peer group. Presently, the drugmaker’s annualized yield stands at a noteworthy 4.3%.

However, AbbVie is facing some significant headwinds. The company’s flagship product, Humira, which treats various inflammatory conditions, lost patent protection in the U.S. earlier this year. Humira was responsible for 28% of AbbVie’s revenue in the first quarter of 2023. It has also been a strong contributor to the company’s free cash flows over the years due to its high price and ever-expanding utility within the sizable immunology market.

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As Humira faces biosimilar competition, can AbbVie maintain its attractive dividend? Let’s dig deeper to find out.

A look at AbbVie’s dividend prospects

Normally, dividends are paid out of a company’s cash flow. Hence, it’s important for income investors to have a handle on whether a business is generating enough free cash flow to cover dividend payments.

In the first quarter of 2023, AbbVie distributed about $2.7 billion in dividends to its shareholders. The pharmaceutical giant also produced around $4.2 billion in cash flows from its operations during the same period. Based on these quarterly numbers, AbbVie’s dividend seems to be secure.

However, Wall Street is bracing for Humira’s sales decline to accelerate in the coming quarters, as more biosimilars enter the U.S. market later this year. Although it is difficult to estimate the exact impact of this challenge on AbbVie’s financial performance, the company is likely to experience a decline of at least 16.5% in net operating free cash flows compared to the previous year.

Currently, AbbVie plans to pay out about $10.6 billion in dividends to its shareholders this year, unless there are any changes to the program. Net operating free cash flow is tracking to come in at around $20.7 billion for the full year in 2023. Considering these ballpark financial projections, AbbVie’s dividend should be stable in the short term, despite the patent expiration of Humira.

Moreover, AbbVie’s top line might recover in 2024, as newer immunology drugs like Skyrizi and Rinvoq gain market share. This fact bodes well for AbbVie’s dividend program in the near term. In the long term, the company expects to return to high-single-digit revenue growth as soon as 2025, which should enable it to continue paying a top-tier dividend for the rest of the decade.

An important caveat

One underappreciated aspect of this story that arguably deserves more attention from shareholders is the fact that Humira is not the only source of pressure for AbbVie’s business. The company also faces considerable challenges in its hematology and medical aesthetics segments, which could force it to look for an expensive acquisition in the near future.

AbbVie has enough financial flexibility to pursue deals that are below $10 billion, without compromising its balance sheet. However, the number of attractive targets in this price range is limited, and none of them would provide a significant boost to its revenue stream.

To climb to the next rung of the value ladder, AbbVie would probably have to be willing to spend $20 billion or more on business development. A deal of that size would have to be financed partly by free cash flows, which might pose a risk to the company’s dividend program.

The silver lining is that management seems confident that it has the right strategy and assets to overcome the loss of Humira revenue in both the short and long terms. Hence, a thesis-altering business development deal may not be necessary.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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