AbbVie And Merck: Defensive Healthcare Plays Providing Income

Core Insights - The healthcare sector had a mediocre performance in 2023, finishing just over the positive mark, primarily due to its lack of participation in the tech sector's growth [1] - Despite the overall performance, healthcare remains a suitable option for diversified portfolios due to its defensive characteristics and steady demand [1] - AbbVie Inc. (ABBV) and Merck & Co., Inc. (MRK) are highlighted as attractive investment opportunities within the healthcare space, both providing steady and growing dividends [1][2] Healthcare Sector Performance - The healthcare sector's performance was in line with broader market trends, with the Health Care Select Sector SPDR® Fund ETF (XLV) showing ABBV and MRK as top holdings [2][3] - The sector's performance was overshadowed by the tech sector, particularly the "Magnificent 7" companies [1] AbbVie Inc. (ABBV) - ABBV faced challenges due to the Humira patent cliff, which negatively impacted earnings expectations for 2023 and 2024, but analysts anticipate a return to growth in 2025 [4][16] - The company has diversified its product offerings with new drugs like Skyrizi and Rinvoq, which have shown significant sales growth [5][6] - ABBV raised its adjusted EPS guidance for FY 2023 to a range of $11.19 to $11.23 and also increased the EPS guidance floor for FY 2024 to $10.70 to $11 [7] - The company has a history of consistent dividend increases, marking 10 consecutive years of growth, with expectations for an 11th year in 2024 [8][16] Merck & Co., Inc. (MRK) - MRK's primary revenue driver is Keytruda, which accounts for approximately 36.27% of total sales, with other drugs like Gardasil and Lagevrio also contributing to growth [9][12] - In Q3 2023, MRK reported total sales of $15.962 billion, a 7% increase from the previous year, with Keytruda sales growing by 17% [10] - The company is preparing for the patent expiration of Keytruda in 2028, similar to ABBV's situation with Humira, and is actively working on its drug pipeline [12][16] - MRK's dividend growth has been more modest compared to ABBV, but the company has maintained respectable earnings growth and free cash flow [13][14] Investment Considerations - Both ABBV and MRK offer attractive dividend yields of 3.8% and 2.6%, respectively, contributing to passive income for investors [16] - While ABBV's current earnings are under pressure, potential growth is expected post-Humira transition, while MRK is focused on sustaining growth until Keytruda's patent expiration [16]