AbbVie's Dividend Cushion Trails Merck's Amid Capital Expenditure Pressures

What happened

A Seeking Alpha article reports that Merck's projected dividend cushion ratio (DCR) of 2.57x for 2026 exceeds AbbVie's 2.19x, highlighting relative dividend safety concerns for AbbVie as it manages post-Humira transition risks. This DCR pressure arises from AbbVie's capital expenditure plans, which could strain free cash flow despite $19.0 billion in operating cash flow generated in 2025, as noted in the DeepValue report. Critically, the report emphasizes that AbbVie's valuation already discounts durability with no margin of safety, driven by high product concentration where Skyrizi and Rinvoq constitute ~42% of revenue and face policy shocks. The aesthetics segment's ongoing declines and IRA negotiation overhangs further complicate the cash flow outlook, making dividend sustainability more vulnerable to operational missteps. Thus, while current dividends are supported, the weaker cushion signals underlying capital allocation challenges that require closer investor scrutiny.

Implication

The lower DCR projection indicates AbbVie's dividend growth may lag behind peers like Merck, potentially deterring income-focused investors and pressuring the stock's yield appeal. This aligns with the DeepValue report's caution on AbbVie's reliance on Skyrizi and Rinvoq, where execution failures could quickly impair cash flow due to high concentration risks. Investors must assess whether CAPEX investments, such as in U.S. capacity expansions, generate adequate returns to sustain the dividend payout without eroding financial flexibility. Additionally, ongoing aesthetics softness and impending Medicare price negotiations for Botox add layers of uncertainty to the free cash flow algorithm, heightening sensitivity to external shocks. Consequently, while the dividend is not imminently threatened, the reduced cushion necessitates a reevaluation of AbbVie's risk-reward profile in the context of broader sector comparisons.

Thesis delta

The news reinforces the DeepValue thesis's 'WAIT' rating by highlighting a specific vulnerability in dividend safety, but does not shift the core focus on immunology execution. It underscores that AbbVie's capital allocation, including CAPEX, is a critical factor in maintaining shareholder returns amidst already high concentration and policy risks. However, the investment case remains primarily dependent on validating Skyrizi and Rinvoq's growth assumptions over the next quarters.