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Better Buy: AbbVie Inc. vs. Johnson & Johnson

By George Budwell - Jul 22, 2017 at 10:30AM

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These two top dividend stocks are proven winners -- but one stock is clearly the safer bet.

U.S.-based pharmaceutical companies are enjoying a much friendlier business environment under President Trump than his predecessor. President Trump, after all, has backed away from the repeated calls for hard caps on prescription drug prices, and his administration continues to push for corporate tax reform that could bring back hundreds of billions in foreign profits currently stored overseas. 

The dividend aristocrats AbbVie (ABBV 0.37%) and Johnson & Johnson (JNJ -1.10%) appear to be especially well-positioned to benefit from Trump's overtly pro-business stance because of their reliance on high-priced specialty medicines for growth and their considerable overseas cash reserves. With this in mind, let's consider which of these top dividend pharma stocks is the better buy right now. 

Pills on top of money.

Image source: Getty Images.

AbbVie: Is the best yet to come?

AbbVie, a dividend aristocrat by virtue of its separation from Abbott Laboratories in 2013, has more than proven its value to shareholders by producing industry-leading levels of both top-line and dividend growth over the past four years. But the drugmaker has reached a crossroads of sorts following the patent expiration of its main growth driver Humira. Long story short, AbbVie is banking on its deliberate pivot to oncology to keep the growth party rolling.

Through a number of acquisitions in recent years, AbbVie has built one of the most valuable oncology pipelines in the industry. Exciting experimental products like Rova-T for small-cell lung cancer, for instance, are expected to complement the drugmaker's high-value blood cancer drug Imbruvica in the near future. The net result is that AbbVie is forecast by industry experts, such as EvaluatePharma, to push beyond Humira's patent headwinds to remain a top dividend growth stock heading into 2022. 

AbbVie, though, does have some other extremely promising growth drivers outside of oncology. The drugmaker's next-generation hepatitis C therapy, composed of glecaprevir and pibrentasvir, appears primed to take a big chunk out of Gilead Sciences' market share. This novel combo, after all, is likely to gain approval as an eight-week regimen across a variety of genotypes -- giving it a distinct competitive advantage over most of Gilead's therapies that typically require at least 12 weeks of treatment.  

Now that AbbVie no longer has to seriously worry about a hard cap on Humira's ever-growing price tag, and the possibility of deleveraging its balance sheet following corporate tax reform in the U.S. remains in play, this drugmaker's best days may indeed be yet to come. 

Johnson & Johnson: The power of diversification

It's no secret that biosimilars are having a negative impact on J&J's all-important pharmaceutical segment. Sales of the company's blockbuster anti-inflammatory medicine Remicade, for instance, have been slipping in recent quarters, presumably because of competition from Pfizer's copycat medicine Inflectra.

Arthritic hands

Image source: Getty Images.

Most importantly, though, the considerable drag emanating from Remicade's downward trend has also been offsetting the spectacular growth from newer products, such as the multiple myeloma drug Darzalex. As proof, J&J reported that total pharma sales only grew by 1% in the second quarter of 2017, despite Darzalex's sales rising by a whopping 177% to $299 million for the three-month period.  

The good news is that J&J has addressed this issue head on by first spending $30 billion to acquire Actelion's portfolio of pulmonary arterial hypertension medicines, as well as maintaining a top-flight clinical pipeline that sports numerous blockbuster candidates. In fact, J&J's late-stage pipeline is currently ranked second in terms of net present value, falling behind only AbbVie's on this particular metric. 

The point is that J&J's highly diversified pipeline and pharma product portfolio have clearly been an important counterbalance to the ongoing patent cliff, as well as the emergence of unexpectedly strong disruptive competitive threats in the past few years. And corporate tax reform, if instituted, should allow J&J to further diversify its pharma segment through additional M&A activity.   

Which stock is the better buy?

This is a really tough matchup. Both companies offer stellar growth prospects, top notch dividends, and best-in-class clinical pipelines. So in a sense, you really can't go wrong with either stock. Having said that, J&J is probably the better buy simply because of its far more diversified product portfolio. AbbVie, after all, still relies on Humira for about 60% of its total sales. So while this unbalanced revenue mix should flatten out as the company's oncology pipeline matures, J&J is already proving beyond the shadow of a doubt that there's safety in numbers. 

George Budwell owns shares of Pfizer. The Motley Fool owns shares of and recommends Gilead Sciences and Johnson & Johnson. The Motley Fool has the following options: short August 2017 $75 calls on Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$165.30 (-1.10%) $-1.84
AbbVie Inc. Stock Quote
AbbVie Inc.
$142.60 (0.37%) $0.52
Pfizer Inc. Stock Quote
Pfizer Inc.
$50.11 (3.77%) $1.82
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.96 (0.82%) $0.51
Abbott Laboratories Stock Quote
Abbott Laboratories
$111.48 (0.90%) $0.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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