For example, Goldman Sachs recently conducted research where it found that three-quarters of the S&P 500’s 77% returns during the inflationary 1970’s was due to dividends and dividend reinvestment.

Furthermore, dividend-paying companies are significantly profitable, whereas unprofitable companies will be hit the most by economic instability. This is because profitable companies have room to withstand cost and inflationary pressures.

With this in mind, let’s take a look at two dividend shares I’m buying more of.

AbbVie

AbbVie (NYSE: ABBV) is a pharmaceutical giant in the US originating due to a spin-off from Abbott Laboratories in 2013. It specialises in the research and production of innovative drugs.

AbbVie is also a dividend king with 50 years of consecutive pay-out raises. Over the last five years, dividends also increased by an incredible 120%. It also boasts a dividend yield of 4% compared to just 1.82% from the S&P 500 as a whole.

AbbVie is also very cheap, currently trading at a forward price-to-earnings (P/E) ratio of just 12.

However, AbbVie faces some stumbling blocks. Its top selling drug, Humira, is losing its patent next year, allowing competition to produce biosimilar drugs and eat away at the $17bn it brought AbbVie in 2021. This could severely affect its revenue growth.

I’m glad that AbbVie has therefore planned for this, with two potential replacements in its pipeline. Management has provided guidance of more than $15bn in expected sales of Rinvoq and Skyrizi, its new drugs, by 2025. I’m also confident AbbVie can continue its strong growth due to the growth prospects of its general pipeline.

With a projected dividend pay-out ratio of 41% in 2022, AbbVie should be more than able to continue supporting and growing its dividend.

US Bancorp

U.S. Bancorp (NYSE: USB) is the fifth largest bank in the US, focusing on traditional banking services, such as deposit growth and providing loans. Its rigorous nature in only providing high-quality loans helps it achieve an impressive return on equity. This gives it a competitive advantage over competitors.

It also has a dividend yield of 4.4% and 11 years of consecutive dividend hikes. With a pay-out ratio of 36%, it’s also able to support and raise its dividends. Plus, with a forward P/E ratio of just 8, U.S. Bancorp is ridiculously cheap right now.

Furthermore, due to higher interest rates, U.S. Bancorp is generating higher net interest income (NII). NII is the difference in revenue of a bank’s interest-bearing assets with the expenses arising from its interest-bearing liabilities. By increasing interest rates on its loans, NII and thus profit likewise increase.

However, when interest rates are high, consumers prioritise saving money rather than taking out loans. This could potentially push NII and thus profit down.

Now what

Inflation and interest rates are rising, which will affect many companies. However, AbbVie and U.S. Bancorp are very profitable, allowing them to better weather the current economic storm. Their low pay-out ratios mean they can also maintain and even grow their dividends. Both shares are also cheap and have strong growth prospects, which is why I’m buying more shares of these companies today.

Positive outlook, but things need to keep going right

AbbVie (NYSE: ABBV) has and continues to be heavily reliant on Humira, which was responsible for 40% of 2020 revenue, and competes against biosimilars in Europe. Biosimilar entry in the US is anticipated in 2023, and the expectation is that Humira sales will take a further substantial hit. So why is the outlook positive for this pharma stock?

AbbVie’s $63 billion acquisition of Allergan in May 2020 was met by the market with a degree of concern, but there is little doubt that it offered AbbVie some much needed diversification. More notably, however, AbbVie has developed two products that look set to secure its leadership position in immunology in a post-Humira world. Skyrizi and Rinvoq have shown strong uptake in their initial approved indications (psoriasis and rheumatoid arthritis, respectively), and AbbVie is vigorously pursuing additional indications, which should come through in the next 24 months. However, Rinvoq’s approvals for psoriatic arthritis and atopic dermatitis have each been pushed back by a quarter this year, owing to regulatory delays as the FDA investigates safety concerns related to the JAK-inhibitor class.  

A high-risk bet that should pay off in the short term (unless it doesn’t)

Over a decade ago, plucky upstart Amarin (NASDAQ: AMRN) gained FDA-approval for Vascepa, to treat patients with severely elevated triglycerides – a form of cholesterol that contributes to cardiometabolic disease. So far, so uneventful. Fast-forward to December 2019, and the label for Vascepa was expanded to include patients at high cardiovascular risk – effectively growing the potential market for the drug many-fold. Amarin’s share price sky-rocketed, at a rate rarely seen in mature pharma stocks. However, a court ruling in March 2020 in favour of generics challengers caused Amarin’s share price to plummet to a level it has never recovered from.

With the US market for Vascepa no longer the cake-walk it should have been, all eyes are now on Europe. Vascepa received EMA approval for the expanded indication in March of this year, and is set to launch first in Germany. The absence of generic competition, Vascepa’s first-in-class approval for a demonstrably large patient pool, and robust clinical outcomes data all paint a rosy picture. The risk lies in Amarin’s ability to pull it off, as a relatively small, US-based company with no other in-line products, and a handful of generics challengers snapping at its heels in its home-market of the US.

And why not? After all, the underlying business seems to be doing well.

Cyclical recovery?

Before emerging as a separately listed company during 2012, Direct Line made underwriting losses in the wake of the global financial crisis. The firm returned to underwriting profit during 2012, and built on that improvement in 2013. The current year seems to be going well too, but we’ll learn more with the third-quarter interim management statement due on Friday 31 October.

Fluctuating profits reveal the firm’s inherent cyclicality. The financial companies, such as insurers, can see wild share-price fluctuation as profits ebb and flow. That’s why the firm’s valuation bothers me a bit. The forward dividend yield is running at about 7.7% for 2015, and City analysts expect forward earnings to cover the payout just over 1.2 times.

That’s seems a too-good-to-be-true kind of yield, and the thin cover from earnings makes it look vulnerable if earnings start to slip. Is the market trying to tell us that it expects forward earnings to decline soon?

Property-linked investing

Where do you think UK property values are heading? It’s another highly cyclical investing game to play, but if you want to get involved, without all the inconvenience of rolling your sleeves up and actually buying bricks and mortar, you could invest in a property firm such as Mountview Estates (LSE: MTVW).

I love the simplicity of the way the firm describes its activities on its own website: “Mountview Estates P.L.C. is a Property Trading Company.  The Company owns and acquires tenanted residential property throughout the UK and sells such property when it becomes vacant.”            

This is a what-you-see-is-what-you-get investment proposition, with potential hidden value on the balance sheet, and high insider ownership by the controlling family. The firm records properties at cost, implying the market value of assets is in excess the company’s 7740p share price. But I think we should be careful, because the share-price chart is peaking where it did in 2007 — just before the last financial crash.

Make no mistake, if property values fall, so does Mountview’s share price — potentially a long way. The firm is cyclical to the very core.

Pharmaceuticals

FTSE 100 drugs firm Shire (LSE: SHP) (NASDAQ: SHPG.US) stands out among its London-listed peers for its fast-growing credentials. The firm is best known for the attention deficit disorder treatments Adderall and Vyvanse, and is a young, high-energy upstart founded in 1986 and listed on the stock market as late as 1996.

City analysts following the firm expect earnings to grow by 28% this year and by a further 10% during 2015. Yet the shares took a steep dive during October when US operator AbbVie Inc (NYSE: ABBV.US) walked away from a takeover deal.

The shares’ valuation looks more attractive now than for a long time, with the forward P/E rating  running at about 18 for 2015.

But investors expecting Shire’s share price to slump lower when markets opened this morning were disappointed (or maybe relieved) — more than anything else, markets hate uncertainty, and today’s news brings an end to the uncertainty we’ve seen over recent weeks.

Better still, the failed deal comes with an added sweetener for Shire, in the form of a $1.635 billion break fee from AbbVie. That’s equivalent to around 172p per share, which AbbVie must pay Shire by 5pm today, 21 October.

Shareholder payout?

There’s no word yet from Shire on how it expects to spend this windfall.

I’d expect some of it to be used to mop up the vast legal and banking expenses the firm is likely to have incurred while negotiating with AbbVie, but it’s possible that the remainder may be returned to shareholders in the form of a buyback or special dividend.

Is Shire a buy?

It’s been a rollercoaster year for Shire shareholders, but it’s worth noting that the firm’s shares are, as I write, still 35% higher than they were at the start of 2014. That’s not a bad result, against a wider market that’s slumped nearly 7%.

Existing shareholders have the same choice they’ve always had — stay on board for the ride or lock in a healthy capital gain. However, for the first time since July, in my view, buying shares in Shire is now a realistic option for new investors.

Shire now trades on a 2014 forecast P/E of 19, and a 2015 forecast P/E of 17.4.

The firm’s prospective dividend yield remains negligible, at around 0.5%, but it’s worth noting that Shire’s valuation doesn’t look that pricey when compared to those of GlaxoSmithKline and AstraZeneca, neither of which are expected to deliver such strong earnings growth next year:

Shire has other advantages, too. Net gearing of just 15% is lower than AstraZeneca, and massively less than the debt-fuelled behemoth which is GlaxoSmithKline.

Shire’s strong balance sheet means that future growth should translate directly into earnings growth. There’s also the outside possibility that the firm could once again become a takeover target, at some point in the next few years.

I believe Shire is now an interesting buying opportunity for growth investors, and is well worth a closer look at today’s price.

https://youtu.be/9FT7joTzQc0

Likewise, when I heard that AbbVie were bidding for Shire, my first reaction was: who’s AbbVie? The name actually comes from the demerger of Abbott Laboratories into Abbott and AbbVie. AbbVie is a jeu de mots upon the fact that this the life sciences part of Abbott.

Complementary drug portfolios

So why is AbbVie buying Shire? Well, the most obvious reason is the tax implications: by being taxed in Britain rather than the States, the joint company’s tax bill would be slashed.

But dig a little deeper and you will find that these companies have strongly complementary portfolios and research bases. Both companies have expertise in biopharmaceuticals: these are biological treatments, ranging from antibodies to stem cells, which very much represent the future of the pharma industry.

Analysing Shire reveals a business that is really a cluster of smaller companies which it has acquired over the past two decades. Each of these smaller companies has expertise in a particular rare disease.

In the past you would never have thought that treatments for rare diseases would be economically viable. Shire confounds that view by bringing together a portfolio of rare disease treatments with pooled research resources.

But AbbVie faces a looming patent cliff

AbbVie is also a biopharmaceutical company, but its expertise is more mainstream, focusing on immunology, kidney disease, liver disease, neuroscience and cancer. But it has a clear weak point: most of its revenues are generated by the arthritis treatment Humira, which is the world’s bestselling drug. Once Humira’s US patent protection expires in 2016, profitability, and I suspect AbbVie’s share price, will tumble.

Checking the fundamentals tells me that, although I will watch this takeover with interest, I won’t be interested in investing. The share prices of both companies have been rocketing. Shire is now on a 2014 P/E ratio of 27, falling to 23 in 2015. AbbVie is on a P/E ratio of 21. These numbers look pricey, reflecting the rapid growth that both these companies have experienced.

This makes these companies considerably more expensive than GlaxoSmithKline (P/E ratio of 14) and AstraZeneca (P/E ratio of 16), and I would prefer these pharma stalwarts as investments, particularly as both GSK and AZN are past their respective patent cliffs. Plus they have a clear pathway to future growth. We have yet to see what shape the newly merged company’s strategy will take.

Indeed if, as looks likely, this takeover takes place, I just wonder whether this might be the cue for the merged company’s share price to take a downward path. If I were a shareholder, I would consider taking profits once the takeover is completed.

The successful bid represents a premium of 53% against the £34.67 price of Shire shares on 2 May (the last business day prior to AbbVie’s initial proposal).

For each share they held in Shire, investors will receive a cash consideration of £24.44 as well as 0.8960 new AbbVie shares, equating to a value of £52.48 per Shire share based on AbbVie’s closing share price of $53.52 on 17 July, or £53.19 per Shire share based on AbbVie’s 30-day volume-weighted average price of $54.83 to 17 July 2014.

Management at AbbVie claimed that the joining of the two companies “will create a well-positioned and focused specialty biopharmaceutical company, with sustainable leadership positions within areas of unmet need, including immunology, rare diseases, neuroscience, metabolic diseases and liver disease (HCV) and multiple emerging oncology programs”.

Shire shareholders who may not be too familiar with AbbVie’s practices may be reassured by the latter’s commitment to growing a strong dividend, following Shire’s long track record of delivering shareholder value. Additionally, Chairman of the Board and Chief Executive Officer of AbbVie Richard A. Gonzalez commented:

“The combination of AbbVie and Shire is attractive for shareholders of both companies, bringing the potential for strengthened sustainability of top-tier EPS growth, attractive free cash flow and enhanced cash returns to shareholders. The combination would provide us with enhanced access to cash that we can use to expand our portfolio and fund M&A to supplement organic growth.”

Shire’s chairman, Susan Kilsby, said:

“We believe that this offer reflects the substantial value that we have already created for Shire’s shareholders and the strength of our future prospects. We believe that the combined group represents an exciting fit of two complementary businesses that will create a new market leader in specialty pharmaceuticals with a portfolio of fast growing products, a promising pipeline and enhanced growth prospects.”

AbbVie Bids For Shire

AbbVie (NYSE: ABBV.US)’s latest cash-and-stock proposal for Shire (LSE: SHP) indicates that Astra shareholders still hoping to receive a Pfizer (NYSE: PFE.US) bid — and one largely financed by cash — will likely end up being disappointed.

Along with the take-out price, the cash component of Pfizer’s latest proposal for Astra, which was rejected in late May, turned out to be the sticking point in the Pfizer/Astra saga. The cash portion was simply too low to convince Astra management to engage with Pfizer.

Hostile Takeovers

In deal-making, hostile takeovers heighten execution risk for the acquirer, yet Pfizer may decide to approach Astra shareholders by the end of the year. Astra stock is essentially flat since takeover talk vanished. Either way, Astra shareholders won’t get the deal they had hoped for, in my view. If Pfizer agrees to pay up — say, £60 for each Astra share — it will offer more than 50% of the purchase price in its own stock to finance the transaction.

Incidentally, there’s also a chance that Pfizer will look elsewhere to secure a “tax-inversion” deal. Hence, Astra offers little upside right now.

AbbVie/Shire: A Benchmark Deal?

The final stock/cash split that eventually emerges from the AbbVie/Shire deal will be a benchmark for large transactions in the pharmaceutical world. 

Shire said on Monday that it was willing to recommend a £31bn proposal from AbbVie. The US company’s revised proposal stands at £53 per share, and includes a £24 cash portion, while the reminder is represented by AbbVie shares. AbbVie is willing to pay only 45% of the full price in cash. A firm offer has yet to be made but, should it emerge, it will likely carry a similar cash/stock split.

On 19 May, the board of Astra rejected Pfizer’s final proposal, which comprised “£24.76 in cash (45%) and 1.747 Pfizer shares (55%)” for each Astra share, for a value of £55 per Astra share based on the closing price of Pfizer shares on 16 May.

Mating Game

Pfizer stock has gone nowhere since the American company decided to walk away. If Astra executives are right, and their long-term projections are flawless, Astra shareholders will be rewarded without Pfizer. That’s unlikely, in my view.

Pfizer needs Astra more than Astra needs Pfizer, but Astra stock now trades well above fair value, and still prices in an M&A premium. If Pfizer doesn’t make a comeback with a blown-out offer, Astra shareholders will be the ultimate losers. 

Elsewhere, there are striking similarities between some financials reported by Astra in 2000 and its trailing figures for the 12 months ended on 31 March 2014. Of course, Astra has changed over the years, but back then its stock traded at around £36. The unaffected share price of Astra was about £36 in early January, too. Value will be delivered only if a takeover emerges, and it may not be on very convenient terms….

The revised offer from the US firm is equivalent to £53 per share, and consists of £24 in cash and 0.9 shares of the combined new AbbVie, but there is no certainty that any firm offer will be made.

AbbVie produces the rheumatoid arthritis drug Humira, which is one of the biggest selling drugs in history; however, the product will lose patent protection in 2016.

AbbVie’s move for Shire is driven by a desire to become less reliant on its top-selling blockbuster drug and diversify its drug portfolio, and the deal could also result in large tax savings.

Shire said in a statement that “it would be willing to recommend an offer at the level of the Revised Proposal to Shire shareholders subject to satisfactory resolution of the other terms of the offer.”

We will know by Friday whether AbbVie has made a firm offer to shareholders or decided to walk away. Shire’s share price has been pushed up by 75% year-to-date. Whether shares in the a new combined pharmaceutical group will result in similar outperformance remains to be seen. 

Earlier today, AbbVie did submit a raised bid — so was I wrong?

I still say sell

AbbVie’s raised bid is for £22.44 in cash and 0.8568 AbbVie shares for each Shire share. This equates to around £51 at today’s exchange rates.

The offer is an 11% increase on the previous £46 proposal, but interestingly, Shire’s share price has not budged following the news — indeed, as I write, Shire share price has started to fall, and is now down by 3% on this morning’s opening price.

What’s happening?

AbbVie claims to have “met with, or spoken to” Shire shareholders who represent the majority of Shire’s outstanding shares.

However, the fact that Shire’s share price has fallen following the new offer seems to suggest that the City doesn’t expect Shire’s management to take up the offer, increasing the chances that the bid will fall through by the 18 July  deadline.

Indeed, having looked at the details of the offer, I can see several problems with AbbVie’s new bid, which could explain the market’s lack of interest.

Not enough cash

Although this deal would have tax advantages for AbbVie, it might not do for Shire’s largest, long-term shareholders, who could face substantial capital gains tax bills.

Less than half the offer is in cash, so large UK shareholders would also be left with a big pile of AbbVie’s US-listed shares. In many cases, UK funds would be forced to sell these US shares straight after the deal went through, which would depress the price of AbbVie shares, reducing the real value of AbbVie’s offer.

Private shareholders in the UK would experience the same problems, and would face US share dealing and foreign exchange costs, too.

In my view, it seems fair to say that the true value of AbbVie’s revised offer, to most shareholders, is likely to be much less than £51.

Challenging valuation

A second problem is that Shire’s current share price places a seriously ambitious valuation on Shire’s business — around 23 times 2014 forecast earnings.

Shire shares trade at a premium of more than 20% to their pre-bid price, and have risen by 450% since 2009. For most shareholders, I think it’s time to take profits, de-risk, and sell — because Shire shares could plummet if the AbbVie bid fails.