The pharmaceutical industry is big business for many companies, and the giants of the industry have found ways to make huge profits. Among the top participants in big pharma are Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ), and although J&J's business has a much larger scope that fully incorporates other products like medical devices and over-the-counter consumer health products, its pharmaceutical exposure has been its big growth driver in recent years.
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For investors looking to jump into the pharma space right now, the big question is which of these blue-chip stalwarts is the smarter pick right now. With that in mind, let's compare Pfizer and Johnson & Johnson on a number of metrics to see which looks more attractive right now.
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Valuation and stock performance
Both Pfizer and Johnson & Johnson have seen their stocks rise over the past year. But J&J's rise is much more substantial, posting a total return of almost 30% since Sept. 2015. That compares to just 6% for Pfizer during the same time period.
From a valuation standpoint, basing an analysis on earnings-based methods leads to mixed results. When you focus on trailing earnings, Pfizer looks to be the more expensive choice, with its shares trading at almost 30 times its earnings over the past 12 months. By contrast, Johnson & Johnson has a more reasonable trailing multiple of about 22, which is still higher than the overall market but less extreme than Pfizer's figure.
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However, incorporating near-term future earnings expectations reverses the situation. J&J's forward earnings multiple approaches 17, but Pfizer looks a lot cheaper at just 13 times forward earnings. As a result, whether you pick Pfizer or Johnson & Johnson depends on how much credence you give what investors expect the two companies to earn in the near future.
For dividend investors, both Pfizer and Johnson & Johnson have strong pedigrees that reflect their commitment to providing regular income for shareholders. Based on current payouts, Pfizer beats out its rival, with its 3.5% dividend yield exceeding the 2.7% that Johnson & Johnson offers right now.
However, there are other considerations that investors focused on dividends will want to take into account. Johnson & Johnson pays out less than 60% of its earnings in the form of dividends, giving it much more room to consider future increases. By contrast, Pfizer's payout ratio is right around 100% of trailing earnings. That figure is likely to drop if Pfizer's earnings recover as expected, but it's still a warning sign that investors need to consider.
Both companies have also been generous with dividend increases. Pfizer and Johnson & Johnson both added 7% to their respective dividend payments earlier this year, continuing streaks of regular increases from the two pharma giants. However, while Pfizer slashed its dividend by half in 2009 to help finance a major acquisition, Johnson & Johnson has a streak of 54 straight years in which it has raised its dividend annually without ever making a cut. Despite its slightly lower yield, Johnson & Johnson looks like the better choice in terms of dividends.
Growth prospects and risk
Pfizer and Johnson & Johnson have both found ways to grow, despite being mature companies that are large enough to make meaningful growth difficult to achieve. For Pfizer, strategic acquisitions have been the main way that the company has grown, with buyouts of Hospira, Anacor Pharmaceuticals, and most recently Medivation aiming to bolster its long-term prospects. By doing so, Pfizer hopes that revenue from newly acquired drugs will be able to offset falling sales of existing blockbusters as they have gone or will go off patent. The biggest question shareholders disagree about is whether the price that Pfizer has paid for its acquisitions will end up making financial sense for the company. Yet bullish investors believe that the intangible benefits of finding synergies among different pipeline development teams and research methods could be substantial. At the same time, Pfizer has looked to focus on the highest-growth opportunities, and some believe that it could split off non-core assets in order to remain a pure play on its most promising treatment prospects.
Johnson & Johnson requires much closer analysis in order to judge its growth trends, in part because of its wider-reaching scope of business. In its most recent quarterly report, J&J announced sales gains of 4%, but the pharmaceutical division was the big winner for the company, growing at more than double the rate of the conglomerate as a whole. Drugs like Imbruvica, Invokana, Darzalex, and Stelara have posted impressive sales growth, and Johnson & Johnson is looking for ways to allow doctors to use them for additional indications as well. At the same time, though, J&J faces imminent competition from Pfizer on the biosimilar front, with new developments from the rival threatening Johnson & Johnson's blockbuster Remicade treatment. The healthcare conglomerate is likely to seek strategic acquisitions as well, but it has done a good job of developing organic growth and will keep pursuing that strategy as long as it works.
Overall, Pfizer and Johnson & Johnson both have a lot in common. For conservative investors, Johnson & Johnson's more consistent dividend history and greater diversification make it slightly more attractive than Pfizer. Yet for those with higher risk tolerances who believe that Pfizer's recent strategic moves will pay off with higher growth, Pfizer's valuation is low enough to offer a margin of safety even if things don't go as well as investors hope.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.