You’re probably overlooking some of the best dividend stocks of 2014.
That’s because a small group of companies has a history of crushing the market. And a select few of those stocks also reward shareholders with dividends.
These companies are known as spin-offs. They’re typically subsidiaries of large conglomerates that are “spun off” and become a separate publicly traded company. Because they are established companies, they typically don’t get the same publicity as a hot IPO. But these companies often thrive as a stand-alone business.
One of the most famous studies of spinoff performance, Restructuring Through Spinoffs, completed in 1993, found that spinoffs outperformed the S&P 500 by 30% during the first three years. More recently, Lehman Brothers found that between 2000 and 2005, spinoffs beat the market by 45% during the first two years.
Spin-offs rarely pay dividends. But when they do, it’s an investment opportunity that you won’t want to pass up.
Here are a couple examples to consider. Phillips 66 (NYSE: PSX) spun-off from ConocoPhillips (NYSE: COP) in 2012, and since then it’s outperformed the S&P 500 by over 60%. It also pays a 2% dividend yield. Similarly, WhiteWave Foods (NYSE: WWAV) spun-off from Dean Foods (NYSE: DF) just last year and has already outperformed the market by 40%.
A Dividend-Paying Stock to Beat the Market
Abbvie (NYSE: ABBV) has been one of the best performing major pharma stocks since it spun-off from Abbott Laboratories (NYSE: ABT) over a year ago.
Abbvie doesn’t have the name recognition of Merck (NYSE: MRK), Eli Lilly (NYSE: LLY), or Pfizer (NYSE: PFE). But with a market cap of $80 billion, it’s one of the largest pharma companies.
Including the dividend payments, Abbvie investors have seen a total return of 37% over the past year.
Abbvie is one of the few stocks yielding over 3% that have outperformed the market over the last twelve months. But more importantly, it also has the potential to continue to beat the market.
Abbvie’s dividend yield is 3.3%, the highest among its major peers and well above the industry average of 1.7%.
Abbvie spun-off from Abbott Labs at the start of 2013. Instead of juggling a healthcare business and a pharma business, management can focus on growing their respective businesses.
Abbott Labs is one of those consistent dividend payers I mentioned earlier. It has paid a dividend for over 40 consecutive years. However, that doesn’t necessarily make it a great investment. Its dividend yield is 2.3%, but it has underperformed the S&P 500 by over ten percentage points since the Abbvie spinoff.
Abbvie’s 23% return on investment is head-and-shoulders above Abbott Labs. It’s also well above other major pharma companies and close to the 25% return on investment that tech giant Apple (NASDAQ:AAPL) churns out.
Abbvie has a number of tailwinds that will help it continue outperforming over the next few years.
First, there’s its portfolio and pipeline, which should drive revenue and earnings growth. It has a strong drug portfolio for a number of ailments, including HIV, Parkinson’s disease, chronic kidney disease, rheumatoid arthritis, Crohn’s disease and cystic fibrosis. Abbvie also has a deep development pipeline, with several of its drugs already in phase III.
It could launch one of its key compounds for Hepatitis C compound as early as the fourth quarter of this year. With that, 2015 is expected to be a year of impressive growth. Revenues are expected to rise 9%, and earnings could grow 16%.
Second, Abbvie has a flagship drug that should continue generating high-levels of revenue for a number of years. Sales of Humira were over $10 billion in 2013. Part of this is due to the versatility of the product, approved to treat various indications. Yet, Abbvie can still see growth from its key drug with expansion into new markets, such as Japan and China. As well, Humira could be approved for additional indications that could add $1 billion to peak sales for the product.
And third, the overall market for Abbvie’s products is large and growing. The healthcare industry as a whole should see a lift from the roughly 27 million Americans that will gain coverage this year thanks to The Affordable Care Act. Meanwhile, Abbvie is looking to expand its market and reach. Abbvie is making investments abroad. It is setting up its first manufacturing facility in Asia to manufacture oncology and immunology compounds. The facility will be fully operational by 2019.
Abbvie recently increased its dividend for the first time since the spinoff. It now offers a $1.68 annual dividend — a 5% increase from its previous payout. And it trades at a very reasonable forward P/E of under 15.
The great thing about Abbvie is that investors get a leader in one of the faster growing industries. Plus, income investors will be thrilled with the 3.3% dividend yield. That combination makes Abbvie a high-quality dividend stock with the potential to continue outperforming the market.
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