New watchlist addition: Allergan $AGN

A photo by freestocks.org. unsplash.com/photos/nss2eRzQwgwWith all the tumult in the health sector and the fact that we were not able to close a buy on $ABC the other day. We changed direction towards another healthcare stock we were watching closely for a few months now. Allergan $AGN is a solid pharmaceutical company, which might be yet unknown in the DGI community. Probably because it has never, ever paid a dividend yet. But that’s about to change, and that’s why this stock definitely deserves to being watched closely.

As dividend investors we pay attention to a lot of companies paying dividends for some years and continue to grow them. Within our portfolio we have no vast standards for asset allocation. None but one:

We like to take a bit more risk with not so standard companies and stocks you might not see too often in a basic DGI portfolio. So we implemented a ‘rule’ to use 25% of our portfolio for so called ‘satellites’. Check out our investment strategy to read more about it. 

Since we are still young, and tend to grow our portfolio for at least 20 or 30 years, we like to take on some more risk now and then. Although we always carefully analyze any company before we buy, we aim to buy whenever a stock fits our needs and wishes for the long term. 

Allergan is such a company. For now we add it to our watchlist, but we are highly satisfied with their fundamentals and financial metrics. Let’s take a look.

Paying the dividends

After making quite a few acquisitions (Tobira Therapeutics Inc.) and sold their generics business to Teva. It even made an attempt to merge with Pfizer (but failed). Allergan has stated in their quarterly results in the beginning of november that some drug sales were weaker than expected and that it wasn’t planning in making another mega deal.

Chief Executive Brent Saunders have said, “There was no deal out there that was as accretive or compelling as our own stock.” 

Instead they choose to return more cash to shareholders in the form of dividends and to expand their share repurchase program from $10 billion to $15 billion. The first initial dividend payment will be made in march of 2017 with a worth of 70 cents per share.

For us this was the biggest reason to dive a bit further in how they do business.

Why we think Allergan is so attractive

The revenue of Allergan shows some aggressive growth with a 3-year revenue growth rate of 36%. Although they didn’t meet analysts expectations of earnings per share. As for the third quarter, Marketwatch reports the following: 

As for the third quarter, Allergan reported a profit of $15.22 billion, or $38.58 a share, compared with a profit of $5.3 billion, or $13.29 a share, a year prior. Much of the increase came from the impact of discontinued operations.

Excluding special charges and items related to acquisitions and divestitures, earnings were $3.32 a share. Revenue rose 4.4% to $3.62 billion.

Analysts had projected adjusted earnings of $3.56 a share on revenue of $3.68 billion, according to Thomson Reuters.

For the year, Allergan said it now expects revenue of $14.45 billion to $14.65 billion, down from $14.65 billion to $14.9 billion previously. It also expects adjusted earnings of $13.30 to $13.50 a share, down from a prior forecast of $13.75 to $14.20 a share.

In its third quarter, margins were lower than expected on increased investment in manufacturing, sales and marketing, and research and development.

Operating the markets with a wide moat, a 5-star rating from Morningstar and billions of cash still available to either return to investors or invest in the own company Allergan shows an enormous opportunity with lots of potential growth.  

Allergan, Plc’s three main reporting segments are North American branded drugs; North American generic and International drugs (see Actavis, above); and Anda Distribution.  

In the Allergan, Plc structure, North American brands are their own segment because of patent exclusivity. Somewhat obviously, the in-patent period affords manufacturers such as Allergan the opportunity to make their greatest profit. And Botox isn’t just a curious example listed for the purposes of making easy jokes. Botox is indeed atop the list of the company’s best-selling North American branded drugs.  Source: Investopedia

Their customers are not end users, though. But there are 3 large wholesales (which are well known within DGI community) representing 62% of total sales: AmerisourceBergen $ABC, McKesson Corp. $ MCK and Cardinal Health $CAH.

More numbers, please

There is not much to say about dividend growth. But noting there rapid revenue growth, dividends are expected to show some solid growth rates as well. 

Pharmaceuticals rely heavily on research and development. When we look at the rest of the numbers the following stands out. They increase their spendings on research and development with +700% over the last 5 years. And even spend 15% of their sales on R&D. This means they invest a lot in their own products and pipeline, and results in eight new drugs in the pipeline.When a company is spending heavy in R&D, it shows that they are willing to take risks to further its growth and often occurs with innovative pharmaceutical companies. 

Their total return Year to Date is -35%, and with a estimated fair value of $215 by Morningstar, the companies stock is currently trading 9% under fair value. (compared to a trading price of $196).

The forward P/E is with 12.64 very low, considering their index is at 19.59 and in 2015 it was still 18.83. 

Overall conclusion

Allergan operates in a highly volatile market, and there is much uncertainty about what the future will holds for this company. Expected is that their profit will continue to rise. And wile they make major investments in their own business, like R&D. They also start to provide a nice return to it’s shareholders. The recent downfall of the share price makes it an interesting stock trading under fair value (at the moment of writing)

Which companies are currently on your watchlist? Do you also check companies which don’t have lengthy dividend track records? Or do you prefer established companies with years of solid dividend growth? Let us know below. 

 

8 thoughts on “New watchlist addition: Allergan $AGN

  1. Looks like an interesting stock; was totally outside of my radar. It definitely has the potential, also technically seem to be at very interesting levels. In the pharma sector I’m a big fan of Sanofi which is already in my portfolio and I have also made some shy eye contacts with Pfizer.

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      • It might be a stupid way of thinking but somehow I have fear about Swiss companies these years. I don’t have the confidence to predict the effect of the strong CHF on them. Some might jump in here with a full analysis on the currency effect on them, but so far I immediately said no to myself for every Swiss company (once again it might be a fear without grounds)

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      • It’s not stupid at all. It might be just a feeling, but in the past the currency swings with the CHF have already shown it can and will have a great impact on stock prices. And there are still so much more great companies out there so… 🙂

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  2. Although probably not a bunch of dividend watch lists I am eager to see when Warren Buffett moves on from Berkshire if they will start to pay a dividend. They have so much cash saved up I wonder if there will be a time that a new money manager deploys capital or if they will continue the path set up by Buffett.

    I never thought that Apple would pay a dividend so that makes me wonder if Berkshire will do the say.

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  3. Thanks for the summary Divnomics. The dividend history does give me pause though; however, you have to start a dividend growth streak at some point right? You aren’t born a Dividend Aristocrat; it takes time. I love the buyback and dividend figures you announced. Pfizer wanted them for a reason, so they have a strong product line that can hopefully pump out cash flow to return to shareholders. The Pharm industry has some other great values!

    Bert

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    • It’s a bit out of the ordinary to invest in companies with little to none dividend history, for a dividend growth investor. But we love the business behind it and their strong growth trend. As you said, it has to start somewhere 🙂

      Thanks for stopping by!

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