If you're looking for a blue chip stock with a stellar track record of dividend hikes, you're bound to keep bumping into Procter & Gamble (NYSE: PG) and Johnson & Johnson (NYSE: JNJ) as investment candidates.
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After all, between them they boast dominant market positions that have helped deliver 114 years of consecutive dividend raises (54 straight for J&J and 60 straight for P&G).
Yet the two companies are on different operating trajectories right now, which could make one a better investment over the other.
P&G vs. J&J: Key investing stats
Sales growth is for the past complete fiscal year and excludes currency impacts. Data sources: Company financial filings and S&P Global Market Intelligence.
Operating trends: Johnson & Johnson
Johnson & Johnson is getting back to its market-beating ways. The healthcare titan endured a slight sales decline and a 3% drop in net income last year thanks in part to generic competition around its hepatitis C treatments.
Image source: Getty Images.
But 2016 is a different story. Organic revenue is up by about 1% through the first half of the year, and net earnings are up 5% over that time. "We continue to see good momentum," CEO Alex Gorsky told investors in July, "supported by strong underlying growth across our enterprise." The pharmaceutical division had a particularly strong second quarter by logging a 10% boost in organic sales. Yet its consumer and medical device businesses also chipped in solid improvements.
For P&G, it's too early to claim that a rebound has taken hold. Yes, organic volume finally turned higher last quarter. But the consumer products giant is still struggling to defend its market share against threats like value-based competition. And that weakness has made it impossible to deliver the level of profit gains that shareholders expect. Rather than the high-single-digit earnings growth that P&G targets, core EPS fell slightly in each of the last two fiscal years. CEO David Taylor and his team are forecasting a rebound to roughly 6% growth this year even as organic growth slinks along at just 2%.
Cash returns: Procter & Gamble
On cash returns, P&G gets the nod. It isn't exactly a fair fight here, though, given that the company is selling off portions of its business and directing a big chunk of the proceeds right back to shareholders. After divesting 100 brands from its 163 brand portfolio, including Duracell batteries and Coty beauty products, P&G is confident that it can deliver roughly $18 billion per year to investors through stock buybacks and dividends through fiscal 2019.
Image source: P&G.
Johnson & Johnson's cash returns are smaller, at $13.5 billion last year. However, the healthcare giant does have P&G beat in the area of dividend growth. Its payout has grown at a steady 7% annual pace over the last five years while P&G's growth rate has fallen from 7% in 2014 to barely 1% this year.
The Foolish bottom line
On a price-to-earnings basis, there isn't much space between the two stocks' valuations. P&G seems slightly more expensive at 24 times earnings compared to J&J's 22. Looking at sales, it's clear that the market is assigning a large premium to Johnson & Johnson. In fact, the valuation gap has rarely been this big between the two companies.
Considering its higher profitability, stronger sales growth, and better recent dividend history, Johnson & Johnson's premium is well deserved, in my view. So at these prices, I'd make a long-term bet on the healthcare giant over Procter & Gamble today.
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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. The Motley Fool recommends Procter and Gamble. 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.