Last week, I shared one of my top picks in this volatile market via automaker Stellantis (STLA). You can get all the details in my analysis, but the short version is that this stock is set up for big cost-savings after a recent merger, trades at P/E ratio of just 3X earnings, and delivers more than 5X the yield of the typical stock in the S&P 500 index at present.
This week, I want to share a bit more about the “MVP” philosophy behind this pick by highlighting another stock that is equally attractive.
MVP stands for three core factors that any income-oriented investor should explore before making an investment — Management, Valuation and Payouts. And the stock I want to explore with you that exhibits these three factors right now is pharmaceutical giant AbbVie (ABBV).
We’ll get to the details in a minute, but first a bit more on why these factors matter so much right now.
MVP – Management, Valuation, Payouts
During much of the last decade, you could throw a dart at a list of stocks and reap the easy profits. But amid current volatility, hyperinflation and threat of global recession… well, if your only investing strategy is to look for a 3% yield then you’re simply not trying.
Real investing, like so many other things in life, takes real work.
That said, you don’t have to overthink things too much. My investment philosophy is deceptively simple because it involves only three must-have factors instead of some complicated mathematical equation.
It focuses on these three key factors that align with long-term success:
- Management strategy: Before you even look at numbers, you need to make sure the underlying business of a stock makes sense. After all, yield is a function of the next 12 months of projected payouts and growth projections depend on everything going right for the next few fiscal years. If you can’t have faith the company will deliver across the next 18-24 months, then these projections are meaningless.
- A fair valuation: Valuation is also a crucial factor to look at before you consider yield or other metrics. Sometimes a good company is simply not trading at a fair price thanks to irrational investor sentiment or market conditions. Long-term income investing depends on purchasing stable companies at the right time, not chasing them as you would a high growth startup.
- Generous dividend payouts: If you can get a nearly risk-free yield of almost 3% in short-term bond funds right now, why would you bother with anything that doesn’t at least match that payout and has no hope of getting any larger? You need substantive dividends you can use to pay the bills now – and more importantly, payouts that are likely to grow even bigger over time.
These three factors are key to a successful long-term return and reliable retirement income. Not only will this protect your hard-earned cash in a tough market, but it will ensure you’re not bleeding down your portfolio via asset sales in the years ahead.
So with the MVP strategy in mind, let’s dig deeper into AbbVie to show these principles in action.
Why AbbVie is an MVP
AbbVie has a compelling strategy that should make it attractive to all sorts of investors. In 2013, AbbVie was spun out of Abbott Laboratories (ABT) to allow its branded biopharmaceutical business to thrive. The legacy business of Abbott is decent but sleepy, populated by consumer health brands like Ensure, Pedialyte and Similac nutrition drinks as well as low-margin generics and diagnostic equipment.
In other words, Abbott is one of those companies that simply takes what the market gives it while ABBV has the specialized products with much higher margins. We’re talking blockbusters like Humira, Imbruvica and Viekira – drugs you surely have heard of, or even take yourself.
And if you want to see just how much more attractive AbbVie is, look how it has stacked up vs. its parent and the S&P over the last 12 months:
Looking forward, AbbVie has a robust research pipeline that can replace these leaders in the years ahead with equally lucrative products. In fact, a new extended consensus forecast from Evaluate Pharma earlier this year predicted ABBV would be the largest of all Big Pharma stocks as soon as 2028 thanks to its continued growth as others fall behind.
All this makes for a management strategy that’s very compelling, so we certainly have the ‘M’ in MVP. But how about the rest?
From a valuation perspective, AbbVie boasts a P/E ratio of only about 10 – far less than many aggressive biotech stocks and in line with peers like its parent company Abbott Labs and well below other Big Pharma players like Johnson & Johnson (JNJ) that boasts a forward P/E of about 17.
That means you’re not overpaying despite recent outperformance and good long-term growth forecasts. So now we have the ‘V’ for Valuation in MVP.
Last but not least, the payouts. This is what really makes AbbVie a slam dunk. While the current yield doesn’t knock our socks off at 3.7%, that is still more than double the typical S&P 500 component and well above Treasury bonds. And unlike Treasuries, you have the potential for significant increases in the years ahead based on ABBV’s history; in 2013 it was paying just 40 cents quarterly but in less than a decade it has seen those payouts more than triple to $1.41 per quarter.
What’s more, those dividends represent only about one third of total earnings so there’s plenty of headroom for additional increases in the years ahead.
With that we have the trifecta of strong management, attractive valuation and great payouts – and AbbVie proves why it is an MVP, and worth adding to your portfolio right now.
Look for Long-Term Income Growth … with a Portfolio You Can Count On!
Here at Contrarian Outlook, we don’t chase fads. We focus on quality investments like this MVP and other similar stocks that prove themselves – in any market.
With a market in transition thanks to very real challenges for the global economy, you can’t afford to play by the old rules or just chase the latest headlines. Instead, you need to seek out the very best stocks that have what it takes to win in any environment.
So what does your portfolio look like? Do you have a few role players without any superstars? Are you hanging on to veteran stocks from past years that are past their prime?
Or do you have an all-star lineup of MVPs that know how to win, no matter what?
If you’re looking to make a change this summer, the research team at Contrariant Outlook has just updated our latest Special Investor Report with our top recommendations for the rest of the year.
These are all investments that can make an instant change to the dynamics of your portfolio, providing stability in a stormy market – and in the long-term, they’re poised to return 15%+ annually in the years ahead!