This means that high-risk securities that are more likely to fail are avoided, rather than double-digit long-term total returns (with maximum safe dividends and increasing dividends) via undervalued blue bets.  To find out what is a blue chip or sleep well at night (SWAN) stock, I use a new three-factor, 11-point quality score based on dividend security, business model and management quality. 8 or higher is a blue chip and 9 or higher is a SWAN layer (which is also blue chips under my new definition).
My largest holding (massive overweight before the creation of the latest risk management positions) is AbbVie (ABBV), which represents 13% of my portfolio and thus net worth. That means I have to diversify over time to meet my risk assessments for most readers.
My personal goal is 5% job limits and 20% sector caps. I do not trim my position by selling ABBV with 6% loss. Not when the dividends are safe, my return is 5.4%, and the company is one of the best Buffett Style pieces available now. It is courtesy of the market's irrational fears over health care in general, and Humira has particularly similar competition.
So let's look at why AbbVie is trading 36% below its full time. But, more importantly, discover why this secure 5.4% provides, fast-growing blue chip is one of the best long-term revenue growth opportunities for value-focused contrarians.
Because, despite what the stock price may indicate, AbbVie is not a dangerous or flailing company, but a thriving one, increasing earnings and cash flow (and dividends) by two digits.
For long-term shareholders, I would recommend respecting Warren Buffet's wise word, the best investor in history with 20.5% CAGR total return in Berkshire (BRK.B) over 54 years, who recommends patience because
"You are neither right nor wrong because the public (stock market) disagrees with you. You are right, because your data and reasoning are correct. "
AbbVie's data clearly shows that the bearish task is not correct, because the company does well on long-term growth / diversification plan who have been in the works since the 2013 spin-off.
Factoring at 22% to 32% off at fair value, that is, this high-yield dividend aristocrat is capable of potentially delivering 17.6% to 21.6% CAGR total return over the next five years. It's not just three to four times what the S & P 500 is expected to deliver, but possibly AbbVie is one of the best revenue growth investments over the next half decade.
The reasons Wall Street hates almost all healthcare stocks right now
AbbVie has not really done worse than most health clinics recently. The whole sector is deeply hated right now, mainly due to the headline risk, particularly of a regulatory / political nature, created by the 2020 campaign's seasonal warming.
A major fear of the market is "wholesale disturbances" such as Medicare-For-All or M4A, if it ever comes to reality. When UnitedHealth's (UNH) chief executive brought this up during the last conference call, the stock went from + 3% to -7% within a couple of hours.
As I pointed out in a recent article explaining why UnitedHealth was a strong buy (which I recently purchased for my pension portfolio), M4A, or some form of single payer health service, is a very likely worst case scenario that requires many things to happen in concert.
- Democrats are in control of all three branches of government (possible)
- The Senate's Filibuster Rule is suspended (the core business that has not been seriously considered for over 200 years)
- Medicare For All passes the majority (some conservative democratic senators can vote against it)
- The 5/4 conservative leaning Supreme Court upholds the law in the face of certain legal challenges
According to fivthirtyeight.com, while Democrats are in a better position to take the Senate by 2020, they must still win 3 or 4 seats (depending on who wins the presidential competition). While the GOP is defending 22 seats against the Democracy 12, Republicans are still favored to keep control of the Senate.
Without control of all three governmental governments, M4A is DOA, and healthcare providers are likely to grow sharply as they did after the Obamacare (Affamable Care Act) failed to destroy the business models of various health enterprises that feared.
(Source: YCharts) Performance since the ACA expired on March 23, 2010.
The quality of the blue chips quality service, like AbbVie, has managed to surpass the red, hot S & P 500, despite the infinite regulatory / political the risks It has been something investors have had to contend with for decades.
One of these risks, which is a greater concern than one-time payers, is changes in the drug protection regulations. In February, the US Department of Health and Human Services outlined a number of proposals to reduce drug costs by potentially banning the current rebate system where the pharmacy's managers negotiate reduced drug prices on behalf of health insurance companies.
According to HHS, between 2011 and 2015, Medicare Part D reimbursed for labeled drugs 77%, while the consumer out of pocket accounted for almost doubled. Therefore, the FDA has called the current "rigged" rebate system because drug users are using heavy discounts on list prices (up to 50% in some cases) to access beneficial form management as well as bundle drinks together.
This is a way that great pharma minimizes the detrimental sales decline when the drug goes off patent and is subjected to generic / biosimilar competition. With AbbVies Humira set to lose patent protection in 2023 in the United States, this is a major concern for investors.
But such regulatory risk is just something investors need to be comfortable with (including scary headlines that provide sharp but most overblown short-term declines).
Politicians and regulators often talk about a big game about sticking it to "greedy health care". But money speaks higher than words and the healthcare system spends nearly $ 300 million a year on its army of 1,440 lobbyists to make sure worst-case scenarios don't come true.
Subjects Used By Lobbyists For Industry Between 1998 And 2018
In fact, the drug / medical industry has been the largest lobbyist for the past 20 years, with total lobbying dollars from all health producers totaling about $ 8 , $ 4 billion or $ 420 million a year.
Whatever your personal opinion of such lobbying, health care is still an important sector whose deep pockets and generous politician donations have so far proved all the bears of the bears. Therefore, I consider buying health care blueprints such as AbbVie at baseline values to be a low-risk / high probability opportunity for locking in generous and growing income plus double-digit long-term total return.
With regard to AbbVie's company-specific risk, the largest by far is the ongoing dependence on Humira for 57% of sales and over 70% of operating profit. Humira is currently on the way to becoming the best-selling drug in history, but as Gilead Sciences (GILD) investors know well, there are disadvantages to mega-blockbusters that they can create massive growth highs when sales increase.
Regarding Humira, patent expiry now occurring
- EU patents expired in 2018
- Most major markets 2021
- US 2023
2018 was a very frightening year with AbbVie investors because the loss of EU patent protection meant a lot of biosimilar competition that hit the market at the turn of the year.
AbbVie's former CFO Bill Chase outlined some rather gloomy sales forecasts at the Q4 conference
"We expect 2019 international Humira to be down about 30% on an operational basis, reflecting the impact of biosimilar competition outside the US "- Bill Chase, former CFO (emphasizes)
The good news is that ABBV has hit various license agreements with competing drug manufacturers (six in total, including the latest) in the United States. This means there is little chance of biosimilar competition in America (72% of worldwide Humira sales in Q1) before 2023.
The bad news is that Morningstar expects around 20% long-term global Humira sales to decline and 9% and 16% fall in the US in 2023 and 2024, respectively (before they stabilize).
Despite the challenges and growth head that the company faces, there are several reasons why AbbVie remains one of my highest conviction buying recommendations (and the largest holding in the pension portfolio).
AbbVie's quality management team delivers on its growth plan
- Sensei Quality Score: 9/11 (SWAN stock)
My investment strategy is based on a simple mantra of "quality first, appreciation others and patience and discipline always." I only companies from my watch list, which include Level 8 or Higher Quality Companies (135 and count). I update the list as I do annual task updates for Simply Safe Dividends, where I am an analyst covering over 200 companies a year.
AbbVie is a level 9 quality company, making it a SWAN store in my opinion. 45% of my Quality Score is based on dividend security, since dividends represent an important part of my strategy (the main goal actually). I see them as royalties that will eventually regain my original investment but also grow over time, maximizing the chance that my stake in a company increases exponentially in value.
AbbVie's dividend appears to be safe, thanks to the recessionary cash flow and management policy of maintaining an approximately 50% FCF payout ratio.
The second half of the dividend security equation is the balance.
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