Why Did Buffett Buy AbbVie?

Warren Buffett’s Berkshire Hathaway embarked on a Big Pharma shopping spree in the third quarter of 2020, purchasing shares in four major US drugmaker stocks for a combined fee of over $5.66 billion. 

Among the companies Berkshire bought was biopharma outfit AbbVie Inc. (ABBV), a spin-off of the long-established Abbott Labs health care brand.

This was the first time ABBV made it onto Buffett’s legendary portfolio, the only surprise being that it took so long; the company checks most of the boxes for a typical Buffett pick, and is decidedly undervalued to boot.

If cash rich, high yielding dividend stocks excite your interest, you might want to stick around – AbbVie is all of these things, and plenty more besides.

How Much AbbVie Does Warren Buffett Own?

Warren Buffett obviously likes the look of AbbVie: having made his initial acquisition of the stock in late 2020, Berkshire Hathaway continued to load up on the company again in February 2021, and now owns 20.5 million shares in the Illinois-based biopharmaceutical business.

While we can’t be sure exactly what price Berkshire Hathaway paid for its AbbVie shares, we do know the price range that the purchases had to fall within.

When Buffett first bought ABBV in Q3 2020, he gained 21.3 million shares for somewhere between $85.91 and $100.83, with the average closing price being $94.15. Similarly, when he bought again in Q4 2020, the shares were trading in the region of $80.49 and $108.67, the average price on this occasion coming in at $96.10.

At today’s market price, Berkshire’s AbbVie holdings are worth around $2.3 billion, account for 0.79% of the fund’s total portfolio value, and are the 17th largest investment that the group currently owns.

Why Did Buffett Buy AbbVie Stock?

Just like many other successful pharmaceutical companies, AbbVie is a high cash enterprise. In fact, the firm reported a record free cash flow of $4.695 billion for the period ending June 30, 2021.

We know that the Oracle of Omaha looks for firms with strong cash positions, and AbbVie’s trailing twelve month total FCF presently sits at $20.45 billion – the highest out of all the four pharma stocks he took a hold of last year.

AbbVie also offers a very attractive dividend, which is another thing that Buffett likes to keep an eye out for. The drugmaker has a high yielding dividend at a current forward rate of 4.35%, and maintains a healthy payout ratio at 41% as well.

The company is actually a Dividend Aristocrat by virtue of its parent company Abbott Labs – which has increased its own dividend for the past 49 years – and AbbVie isn’t going to let that accolade slip.

Indeed, since its spin-off in 2013, ABBV has not failed to raise its annual dividend, sometimes doing so more than just once a year. Indeed, the firm’s dividend has tripled since it first declared a quarterly payout of $0.40 in June 2013 – and now stands at an annualized total of $5.20, up 10% from this time last year.

Are There Any Risks Of Owning AbbVie Stock?

While AbbVie is busy developing a slew of new drugs likely to come to market in the very near-future, the company presently faces a generic competition headwind to one of its most successful drugs, Humira – which loses its licence exclusivity in 2023.

ABBV is well prepared for this, however, having other autoimmune medications in the pipeline which should soften the blow to Humira’s reduced money-making potential.

Furthermore, AbbVie has recently diversified its portfolio with a $63 billion buyout of Allergan, and will see additional revenue streams generated from newly acquired big name brands such as Botox and Juvederm.

Is AbbVie Stock A Good Investment?

For Buffett, purchasing shares in AbbVie, Merck, Pfizer and Bristol Myers Squibb last year was a sensible way to get exposure to the rapidly growing health care sector.

The industry is responsible for nearly 20% of the gross domestic product in the US, and before Berkshire’s latest stock spree, the investment vehicle had only two biopharma companies on its books: Teva (TEVA) and Biogen (BIIB)

But AbbVie’s main selling point – its excellent dividend notwithstanding – is simply that the company is really rather cheap right now. The firm trades at a very reasonable 8.9x forward price to earnings, and a price to sales ratio of just 3.6x.

Add to that fact the company has a gross profit margin of 68.1%, is growing revenues at a rate of 48.3% per year, and that it beat both top- and bottom-line estimates on its last earning card, and you can clearly grasp what an opportunity this business presents.

However, is now the right time to buy?

Warren Buffett already cashed out a small fraction of his ABBV shares in the first and second quarters of 2021, selling 2.66 million and 2.34 million shares at an average closing price of $106.96 and $112.62 respectively.

Nonetheless, AbbVie remains an undervalued asset, and still only attracts short interest of just 0.75%, suggesting the wider market sees the company as a reliable growth stock too.

Don’t be a contrarian and try to buck the consensus on this one. Buy AbbVie – and buy it now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.