# AbbVie Inc. (ABBV)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

AbbVie Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 15.62%
0 DPS01 3.59
1 DPS1 3.82 = 3.59 × (1 + 6.53%) 3.31
2 DPS2 4.12 = 3.82 × (1 + 7.65%) 3.08
3 DPS3 4.48 = 4.12 × (1 + 8.78%) 2.90
4 DPS4 4.92 = 4.48 × (1 + 9.91%) 2.75
5 DPS5 5.47 = 4.92 × (1 + 11.03%) 2.65
5 Terminal value (TV5) 132.41 = 5.47 × (1 + 11.03%) ÷ (15.62%11.03%) 64.10
Intrinsic value of AbbVie Inc.’s common stock (per share) \$78.78
Current share price \$86.98

Based on: 10-K (filing date: 2019-02-27).

1 DPS0 = Sum of the last year dividends per share of AbbVie Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.21% Expected rate of return on market portfolio2 E(RM) 11.47% Systematic risk of AbbVie Inc.’s common stock βABBV 1.45 Required rate of return on AbbVie Inc.’s common stock3 rABBV 15.62%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rABBV = RF + βABBV [E(RM) – RF]
= 2.21% + 1.45 [11.47%2.21%]
= 15.62%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

AbbVie Inc., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Dividends declared 6,045  4,221  3,823  3,431  2,806
Net earnings 5,687  5,309  5,953  5,144  1,774
Net revenues 32,753  28,216  25,638  22,859  19,960
Total assets 59,352  70,786  66,099  53,050  27,547
Stockholders’ equity (deficit) (8,446) 5,097  4,636  3,945  1,742
Financial Ratios
Retention rate1 -0.06 0.20 0.36 0.33 -0.58
Profit margin2 17.36% 18.82% 23.22% 22.50% 8.89%
Asset turnover3 0.55 0.40 0.39 0.43 0.72
Financial leverage4 13.89 14.26 13.45 15.81
Averages
Retention rate 0.05
Profit margin 18.16%
Asset turnover 0.50
Financial leverage 14.35

Dividend growth rate (g)5 6.53%

Based on: 10-K (filing date: 2019-02-27), 10-K (filing date: 2018-02-16), 10-K (filing date: 2017-02-17), 10-K (filing date: 2016-02-19), 10-K (filing date: 2015-02-20).

2018 Calculations

1 Retention rate = (Net earnings – Dividends declared) ÷ Net earnings
= (5,6876,045) ÷ 5,687 = -0.06

2 Profit margin = 100 × Net earnings ÷ Net revenues
= 100 × 5,687 ÷ 32,753 = 17.36%

3 Asset turnover = Net revenues ÷ Total assets
= 32,753 ÷ 59,352 = 0.55

4 Financial leverage = Total assets ÷ Stockholders’ equity (deficit)
= 59,352 ÷ -8,446 =

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.05 × 18.16% × 0.50 × 14.35 = 6.53%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$86.98 × 15.62% – \$3.59) ÷ (\$86.98 + \$3.59) = 11.03%

where:
P0 = current price of share of AbbVie Inc.’s common stock
D0 = the last year dividends per share of AbbVie Inc.’s common stock
r = required rate of return on AbbVie Inc.’s common stock

#### Dividend growth rate (g) forecast

AbbVie Inc., H-model

Year Value gt
1 g1 6.53%
2 g2 7.65%
3 g3 8.78%
4 g4 9.91%
5 and thereafter g5 11.03%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 6.53% + (11.03%6.53%) × (2 – 1) ÷ (5 – 1) = 7.65%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 6.53% + (11.03%6.53%) × (3 – 1) ÷ (5 – 1) = 8.78%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 6.53% + (11.03%6.53%) × (4 – 1) ÷ (5 – 1) = 9.91%