The last five years have been kind to nearly all investors. But health-focused companies like Johnson & Johnson (JNJ -0.85%) and AbbVie (ABBV -2.22%) have been particularly profitable indeed. Inclusive of dividends, these two have more than doubled and tripled, respectively.

Female doctor holding up a red pill.

Image source: Getty Images

But which stock is the better buy today? There's no way to answer that question with 100% certainty. However, by examining it through three different lenses, we can get a better idea of what we're getting when we buy shares.

Sustainable competitive advantage

If there's one aspect of a stock that long-term shareholders should devote most of their time to, it's a company's sustainable competitive advantage, or moat. In its most basic sense, a moat is what keeps customers coming back to the same company over and over while holding the competition at bay.

AbbVie's key moat comes in the form of the patents that the company has on key drugs. Those patents came in handy in late 2017 when AbbVie got Amgen to back off plans to offer a drug similar to AbbVie's Humira. The company also has a psoriasis drug coming out -- risankizumab -- that promises to be at least twice as effective as the current market leader. Treatments for leukemia patients -- via Imbruvica and, more recently, Venclexta -- have also shown great promise.

But as much promise as AbbVie's drugs have, the moat they provide is forever tenuous. Had the Amgen situation gone the other way, AbbVie could have been looking at steep declines in Humira sales in 2018. There is little way to predict with any level of accuracy how these decisions will play out.

That's why I think Johnson & Johnson's moat is wider. The company has three divisions. One of them -- pharmaceuticals -- is exposed to the same threats as AbbVie. That division accounted for almost half of revenue last quarter. It enjoyed a stellar 2017, with the significant acquisition of Actelion and continued strong sales of Remicade despite biosimilar competition.

But Johnson & Johnson also has consumer and medical devices divisions, which accounted for 17% and 34% of sales last quarter, respectively. The consumer division is protected by a portfolio of very strong brands, including Tylenol, BandAid, Benadryl, and Listerine. The medical device portfolio is protected by high switching costs, as hospitals and medical care centers fork over big bucks for the company's DePuy surgical products.  

At the end of the day, that diversity creates -- in my opinion -- a wider moat.

Winner = Johnson & Johnson

Financial fortitude

There are really only two things healthcare investors want to see happen with excess cash. The first is pumping that cash back into the company, primarily in the form of R&D spending. This helps ensure a company has a pipeline of drugs or devices that are market-leading.

The other is to see that cash returned via dividends, which both of these companies already do.

But there's something to be said for keeping plain old cash lying around. That's because all companies -- especially in this industry -- will happen upon difficult economic times. When those times hit, players with huge war chests can actually emerge stronger by buying up rivals, repurchasing shares at a discount, or simply outspending the competition to gain long-term market share.

Keeping in mind that Johnson & Johnson is valued at more than twice the size of AbbVie, here's how the two stack up.




Free Cash Flow

Johnson & Johnson

$16 billion

$27 billion

$18 billion


$12 billion

$34 billion

$8 billion

Data source: Yahoo! Finance. Cash represents cash and short- and long-term investments. Free cash flow presented on trailing twelve month basis.

One look at each company's free cash flow should be enough to tell you that they're both in excellent shape. That being said, AbbVie -- the smaller player -- is using far more leverage right now than Johnson & Johnson. While that spending could translate into outperformance over the long run, it makes the company more fragile to economic downturns, whether macro or company-specific.

Winner = Johnson & Johnson


Finally we have valuation. This is a bit of a murky science, as no single metric can truly capture how "cheap" or "expensive" a stock is. The best we can do is consult as many data points as make sense to get a more holistic picture. Here are five of my favorite.




PEG Ratio


FCF Payout

Johnson & Johnson












Data source: Yahoo! Finance, E*Trade. P/E presented using non-GAAP EPS. N/A =
Not applicable.

On the surface, these two are pretty evenly matched. Their price-to-earnings and free cash flow ratios are virtually identical. And both have very solid dividends, with only half of their free cash flow being eaten up to make the quarterly payments to shareholders.

But when growth is taken into consideration via the PEG Ratio, AbbVie trades at a significant discount to Johnson & Johnson. That's enough for me to give AbbVie the nod here.

Winner = AbbVie

My winner is...

So there you have it. Perhaps I'm being a bit more conservative by siding with the slower growth company, but I believe Johnson & Johnson's moat and financial fortitude are enough to give it an edge over AbbVie's drug portfolio and attractive price tag.

That being said, I'm not particularly enthusiastic about either company, as I tend to shy away from pharmaceutical players altogether. It can be very difficult to tell which products will be market hits and which won't, and I tend to put those in the "too hard" pile -- which is why I haven't made CAPS calls on either company for my own portfolio.

If, however, you do have a greater level of comfort with the industry, I suggest starting out with Johnson & Johnson, as the conglomerate gives you diversified exposure to much of the industry.