Better Buy: Johnson & Johnson vs. AbbVie

By Markets

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Keeping the world healthy takes a huge amount of effort, and many of the largest companies on the planet have made it their mission to make people healthier and make money in the process. Two leaders in the industry are Johnson & Johnson (NYSE: JNJ) and AbbVie (NYSE: ABBV), and both have done a good job of generating profits for investors. AbbVie is slightly more focused on the pharmaceutical side of healthcare while Johnson & Johnson has a broader set of products that encompasses over-the-counter products as well as a highly specialized medical device business. Yet after strong stock performance from both, curious investors want to know which makes more sense to add to portfolios now. Let's compare Johnson & Johnson and AbbVie on a number of metrics to see which looks more attractive right now.

Valuation and stock performance

Both Johnson & Johnson and AbbVie have seen their stocks rise over the past year. But J&J has climbed much faster, jumping by more than a third since last September. That compares to a quite respectable but still inferior 21% gain for AbbVie over the same 12-month time period.

When looking at valuations, the fact that Johnson & Johnson has climbed more quickly than AbbVie shows up in their relative price tags. Focusing on earnings over the past year, Johnson & Johnson trades at a trailing earnings multiple of 22. That compares to less than 19 for AbbVie, making the smaller company the more attractive. A similar result happens when you incorporate future earnings expectations into the picture. J&J's forward multiple is 16.5, which is just three-quarters of its trailing earnings multiple. But AbbVie carries a forward multiple of just over 11. Based solely on valuation, AbbVie gets the nod over Johnson & Johnson based on these simple measures.


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For dividend investors, both Johnson & Johnson and AbbVie have good track records and are attractive to income investors. AbbVie has the better yield right now, weighing in at 3.5% dividend yield. Johnson & Johnson pays a 2.7% yield. Interestingly, both companies have payout ratios in the neighborhood of 60%, indicating that AbbVie has the stronger earnings power to back up its higher dividend yield. That's consistent with expectations for higher earnings in the near future.

Both companies have also made sizable dividend increases. AbbVie paid a nearly 12% increase in its dividend in early 2016, and Johnson & Johnson gave investors a 7% raise. By doing so, Johnson & Johnson lengthened its streak of consecutive dividend increases to 54 straight years. AbbVie has only been around for a few years, but former parent Abbott Labs (NYSE: ABT) had a similar 43-year streak of dividend increases if you adjust for the AbbVie spinoff. In terms of dividend growth, both AbbVie and Johnson & Johnson have strong credibility in sharing their successes with shareholders. The two companies are quite close to each other, with AbbVie getting the nod for a slightly higher yield even with J&J's lengthier streak of annual boosts.

Growth prospects and risk

Johnson & Johnson and AbbVie have worked hard to find success in what has become an increasingly cutthroat industry. For Johnson & Johnson, the pharmaceutical division has emerged as the high-growth producer, doubling the growth rate of the entire company. Several blockbuster drugs have allowed J&J to offset the threat of patent cliffs on the pharma business' overall revenue. For the most part, Johnson & Johnson has looked to develop its business internally, avoiding the high-profile acquisitions that some of its rivals have pursued. Steady growth prospects give J&J the blue-chip reputation it has earned from countless investors. Yet some worry about the downward pressure that the medical device business has had on the company overall, holding back the faster-growing pharma division.

On the other hand, AbbVie has had to prove that it has a future beyond its best-known blockbuster. For years, AbbVie's success has centered on Humira, the anti-inflammatory treatment that has driven the bulk of its sales. AbbVie's main patents on Humira are slated to start expiring toward the end of this year, and thus far, efforts to find a replacement for potential lost revenue from the drug have been mixed at best. AbbVie spent $21 billion to acquire Pharmacyclics and its 50% share of profits from cancer treatment Imbruvica, with J&J owning the other half. Despite its purer-play status, AbbVie has a lot more uncertainty than Johnson & Johnson, justifying its cheaper valuation.

Overall, Johnson & Johnson and AbbVie offer different propositions to investors. Johnson & Johnson's longer dividend history, more secure pipeline, and diversification make it a good blue-chip choice for investors. AbbVie is less expensive but carries risks, and the company will have to overcome those risks in order to prove that its stock was indeed a true bargain at current levels.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool 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.