Why AbbVie Inc.'s Shares Rocketed 16% in January

So what

Investors are less nervous about generic competition to AbbVie's best-selling drug, Humira, following a bullish outlook from management at the J.P. Morgan healthcare conference last month.

Humira's $18.4 billion in sales accounted for about 65% of AbbVie's total revenue last year, and some of its patents have already started to expire. Nevertheless, management isn't worried. It expects Humira's sales will increase to $21 billion in 2020, giving it time to expand the addressable market for its existing drugs and launch new drugs that can offset any lost sales when competitors finally do arrive.

In 2018, AbbVie thinks that growing demand for Mavyret, its hepatitis C drug, will add more than $1 billion to sales and that Imbruvica, a chronic lymphocytic leukemia drug, will continue to make headway toward its long-term goal of $7 billion per year in revenue. Its endometriosis drug, Elagolix, could begin adding to the top line this year too, if the FDA gives it an OK.

A bit further out, FDA applications for approval for Rova-T, upadacitinib, and risankizumab in small-cell lung cancer, rheumatoid arthritis, and psoriasis, respectively, could be filed in the next year. Those are multibillion-dollar indications, so AbbVie thinks its non-Humira revenue could increase from about $9 billion to $35 billion by 2025 if these drugs win a green light.

Now what

If AbbVie fends off Humira lookalikes for a while longer, then investors could be handsomely rewarded. The company's sales growth gives it enviable operating leverage, and that leverage, plus tax reform, gives it plenty of financial flexibility to return more money to investors through dividends.

Since it was spun out as its own company in 2013, AbbVie's increased its dividend by 77%. Yet its cash dividend payout ratio -- a measure of its ability to afford its dividend -- still remains below 50%. With management thinking operating margin can increase to 50% from 34% and predictions for an effective tax rate that's below 13% over the next five years, the odds are pretty good that income investors are going to benefit from putting AbbVie in their portfolios.

10 stocks we like better than AbbVie

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and AbbVie wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 5, 2018

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.