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The One Dividend Stock That Made the Cut

If you’re an income investor, you probably already know that valuations for most dividend payers are beyond ridiculous and approaching the absurd.

At the outset of 2016, we saw that the financial markets and global economy were creating the perfect conditions for utility stocks and other blue-chip dividend payers to thrive. Indeed, we predicted that this might be another year of the utility.

While it’s fun watching normally staid stocks produce double-digit returns in a very short time, at a certain point such a performance becomes unhealthy, especially when share prices are completely disconnected from fundamentals.

Of course, the market as a whole is getting similarly expensive. And on Thursday, it closed at a new all-time high. So there are few bargains out there in general, and even fewer when you narrow your focus to dividend payers.

How few? Just thirteen: That’s the number of stocks in the S&P 500 that offer an enticing yield at a reasonable price.

To be more precise, we looked for stocks that currently yield at least 3%, enjoy a consensus buy rating among Wall Street analysts, currently trade below consensus 12-month target prices, and whose price-to-earnings (P/E) ratios are below their sector’s average.

If we get a bit more stringent with our parameters by looking for stocks that trade 5% or more below their 12-month target prices, then just 10 remain.

And since we’re risk-averse income investors, let’s ditch any stocks that exhibit the sort of volatility that might keep us up at night.

Of the 10 stocks that made our second cut, just one has been less volatile than the broad market: the pharmaceutical company AbbVie Inc. (NYSE: ABBV).

In fact, AbbVie currently boasts some very impressive numbers in terms of both growth and income.

The $102 billion drug-maker, which was spun off from Abbott Laboratories (NYSE: ABT) back in 2013, currently trades at a share price that’s nearly double that of its market debut.

AbbVie has been no slouch on the dividend front either: The company has grown its dividend 12.5% annually over the past three years, for an annualized payout of $2.28 per share and a forward yield of 3.6%.

Equally impressive, analysts forecast the company will grow earnings per share 15.2% annually over the next five years. And they expect that growth to flow through to the dividend, which is projected to rise 7.9% annually over that same period, to $3.33 per share, or nearly 50% higher than the current payout.

Meanwhile, as the market pushes to new highs, shares of AbbVie are off about 11% from their trailing-year high last July. And the stock trades at a P/E ratio of just 14.8, compared to 20.0 for the broad market and 40.2 for its sector.

The company currently has mostly bullish sentiment among Wall Street analysts, at 13 “buys,” eight “holds,” and one “sell.” And the consensus 12-month target price is $70.41, which suggests potential appreciation of 11.0% above the current share price.

Even with all these impressive statistics, the company is not without risk. In fact, there’s a biggie: AbbVie derives more than 60% of revenue from the rheumatoid arthritis drug Humira. And this drug could start facing competition from generics when a key patent expires in December.

However, management is attempting to protect Humira with a different set of patents. My colleague Ben Shepherd, who’s our resident healthcare-sector specialist, notes that other pharmaceutical companies have used the same strategy to stave off competitors, so this move could buy the firm another four years.

Even so, the pharmaceutical maker is aggressively working toward expanding its drug pipeline, particular with new cancer treatments. The company has more than 50 active clinical-development programs, and management expects to bring at least 20 new medicines to market by 2020.

Although AbbVie’s exposure to Humira might make it a bit too risky for some income investors, its stock certainly offers a compelling value at current prices.

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