The healthcare industry combines giant companies that have well-established track records for keeping the world healthy with up-and-coming innovative businesses that hope to transform the existing landscape of healthcare. Intuitive Surgical (ISRG 1.40%) isn't the newest kid on the block by a long shot, but it's still in the process of working out just how pervasive its robotic surgical systems can be within the medical community. Meanwhile, Johnson & Johnson (JNJ 2.40%) has helped patients for decades with its mix of pharmaceuticals, medical devices, and consumer products that line the medicine cabinets of billions of people across the globe.
Both Intuitive Surgical and Johnson & Johnson have done well for their shareholders lately, but those who are just now looking at the space want to know which one is the smarter play right now. Let's compare Intuitive Surgical and Johnson & Johnson on a number of metrics to see which looks more attractive right now.
Valuation and stock performance
Both Johnson & Johnson and Intuitive Surgical have seen their stocks rise over the past year, but the latter has crushed its larger rival. The robotic surgical specialist has seen an 88% rise in its stock price since January 2017, compared to a solid 26% gain for J&J.
From a valuation perspective, current readings on both stocks are a bit jumbled right now when you focus solely on what the two companies have earned in the recent past. One-time charges have pushed Johnson & Johnson's trailing earnings multiple into triple digits, while Intuitive Surgical currently trades at 77 times its earnings over the past 12 months.
Near-term future projections give a better sense of the relative valuations of these two stocks. Intuitive Surgical is still quite expensive at nearly 40 times forward earnings estimates, but Johnson & Johnson has a much more reasonable-looking forward multiple of 17. J&J looks like the better pick on valuation, as its stock price hasn't extended itself to the same extent as Intuitive Surgical has.
From the viewpoint of a dividend investor, there's simply no contest between these two companies. Johnson & Johnson pays a dividend yield of 2.3%, which is slightly above the market average currently. Intuitive Surgical has never paid a dividend and is unlikely to do so in the near future, especially with its ongoing capital needs.
Johnson & Johnson is a favorite among income investors because of its healthy payout and its track record of dividend growth. The healthcare conglomerate has made dividend increases every single year for 55 years, putting it in the ranks of the Dividend Aristocrats. The 5% boost it made in mid-2017 wasn't its largest increase, but the gains have come at a steady pace, rewarding long-term shareholders for their patience.
Intuitive Surgical hasn't been a dividend payer, but it's found other ways to be shareholder-friendly over time. Stock repurchases exceeded $1 billion in both 2013 and 2014, and the company made a $2 billion purchase in early 2017. That's a substantial return of capital, but Intuitive Surgical has been opportunistic rather than regular in its repurchase activity. That's not a bad thing, but on the dividend front, J&J is the clear choice.
Growth prospects and risk
Both Intuitive Surgical and Johnson & Johnson have found recent success, but the robotic surgical specialist has had the better experience lately. Shipments of new surgical systems jumped by more than 25% in 2017 to 684, and that has the company expecting full-year revenue to rise 16% from 2016 levels. As the number of systems in the market expands, so too has the recurring revenue that Intuitive Surgical gets from selling instruments and accessories, with a 16% rise in surgical procedure counts showing increased use for the company's da Vinci systems. With the U.S. Food and Drug Administration approving the da Vinci X updated system, Intuitive Surgical is optimistic that demand for robotic surgical equipment will rise again, and the company is spending on research and development to foster further advances in the field and remain a leader in the budding industry.
Johnson & Johnson is still riding the success of its pharmaceutical division. The recent purchase of Actelion has added a new growth driver for the drug segment, and several new drug approvals and new indications for previously approved treatments should help bolster the segment's results in 2018. In the medical device arena, the purchase of Abbott Medical Optics has already paid dividends, and cardiovascular products are also a growth driver that could offset relative weakness in diabetes care and orthopedics. Still, the consumer products space has lagged behind the rest of the company. Johnson & Johnson hopes to spur changes in its product lineup to spur new demand, but it could take time for the company to regain its momentum across all of its business divisions.
In the end, which of these stocks you like better depends on what you're looking for from a stock. Johnson & Johnson is a conservative choice for those who favor current income over lightning-fast growth, while Intuitive Surgical is a higher-risk, higher-reward play. Depending on where you land on that spectrum, either stock could make a good prospect right now.