Better Buy: GlaxoSmithKline plc vs. Johnson & Johnson

By Markets

Image source: Johnson & Johnson.

Continue Reading Below

Many investors gravitate to large-company stocks in the pharmaceutical space because of the combination of growth and reliable dividend income that they offer. GlaxoSmithKline (NYSE: GSK) and Johnson & Johnson (NYSE: JNJ) are giants in their field, and they've both earned well-deserved reputations for taking advantage of opportunities in the pharmaceutical industry that have turned into sizable profits. Yet some question whether pharma stocks have good prospects ahead of them, especially with some pressure from the political arena that could result in narrower profit margin for lifesaving medications. Let's look at both GlaxoSmithKline and Johnson & Johnson on a variety of metrics, with an eye toward seeing if one has an advantage over the other.

Valuation and stock performance

Both GlaxoSmithKline and Johnson & Johnson have rewarded their shareholders with strong returns over the past year. Yet Johnson & Johnson has produced a sizable lead over its rival, with a gain of 34% beating out Glaxo's still-impressive 24% rise since September 2015.

From a valuation standpoint, the two companies look remarkably similar. Glaxo has posted substantial adjustments to its GAAP earnings based on the volatility in the value of the British pound, and that makes the drugmaker's trailing-earnings multiple meaningless for comparison purposes. By contrast, Johnson & Johnson currently fetches about 22 times trailing earnings, which is on the high side of the overall market but not by a huge margin. Using trailing pre-tax operating earnings and incorporating debt and cash on their balance sheets, we find that J&J and Glaxo both have enterprise values that are about 13.5 times their EBITDA (earnings before interest, taxes, depreciation, and amortization).

Bringing future earnings expectations into the equation leads to a similar picture. Glaxo has a slightly lower forward earnings multiple of 16, but J&J trades at 17 times forward earnings, making the difference small. Based solely on valuation, Glaxo and Johnson & Johnson are similar enough to declare a draw between the two pharma giants.

Continue Reading Below


For dividend investors, both Glaxo and J&J have impressive track records that treat income investors well. Glaxo follows a hybrid European model in its dividend payments, making quarterly payouts in varying amounts that generally make its fourth-quarter distribution higher than those earlier in its fiscal year. Moreover, Glaxo keeps its dividend fairly stable when measured in British pounds, but the corresponding U.S. dollar value of those dividends is subject to currency fluctuations. Based on exchange rates prevailing at the time of each payment, Glaxo's trailing dividend yield is over 5%, and that doesn't include a special dividend that would have increased that yield to more than 6.5%. That's quite a bit higher than Johnson & Johnson's 2.8% yield.

Recently, Johnson & Johnson has done a better job of growing its dividend than Glaxo. Even when you ignore currency issues, Glaxo hasn't made an increase to its regular payout since 2013, instead choosing to add a special dividend to its fiscal-fourth-quarter distribution earlier this year. By contrast, Johnson & Johnson boosted its quarterly payout by 7% earlier this year, extending a streak of annual increases that goes back 54 years.

For current yield, Glaxo has a clear edge. But J&J still holds its own when you consider its long track record of dividend growth over the decades.

Growth prospects and risk

Both GlaxoSmithKline and Johnson & Johnson have faced challenges that they've tried to overcome. For Glaxo, the immediate issue is how its blockbuster asthma and chronic obstructive pulmonary disease drug, Advair, will fare when generic competition comes onto the scene. Advair's patents have already expired, but intellectual property related to the Diskus inhaler device that patients use to take Advair has held potential producers of generic versions of the drug at bay. However, the Diskus patents expire this year, which will open the door to rivals entering the space. Advair is important enough that some analysts believe that Glaxo might have to cut its dividend if its sales plunge as expected, and that could lead to an exodus among income investors if it occurs. Moreover, Glaxo's growth strategy based on emphasizing volume rather than price is a risky proposition that could backfire on the company's financials.

Johnson & Johnson is a healthcare conglomerate, and its pharmaceutical division has grown at a faster pace than its consumer products and medical devices businesses. The wide range of areas that J&J tries to cover forces the healthcare giant to move in multiple strategic directions at the same time, and that is sometimes confusing to investors looking for a more integrated business strategy for the company as a whole. In the pharma division, Johnson & Johnson has a promising pipeline and a stable of solid performers generating billions in sales, but patent expirations are a constant threat, along with competition in the industry.

Overall, GlaxoSmithKline and Johnson & Johnson offer similar exposure to the pharmaceutical industry. Each has the potential for strong growth if their research and development efforts go well, and both offer income at reasonable valuations. Those seeking more of a pure play on pharmaceuticals will find Glaxo more compelling, while others who believe that the entire healthcare segment has considerable potential might prefer J&J's broader scope.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

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.