The healthcare industry has many massive players, but they tend to concentrate on different areas of the market. Johnson & Johnson (NYSE:JNJ) is a true healthcare conglomerate, with major divisions covering pharmaceuticals, medical devices, and consumer products that seek to meet all of the needs of its customers. Merck (NYSE:MRK) has a more concentrated emphasis on pharmaceuticals, but it too is among the largest companies in the field with well-known treatments like cancer-fighter Keytruda and diabetes medication Januvia.

Investors have seen these stocks go in different directions over the past year, but some want to know whether one or the other is a smarter pick for an investment portfolio right now. Let's look more closely at Johnson & Johnson and Merck, comparing them using some key metrics to see which is the more attractive stock right now.

Front of Band-Aid box with red wording on white background and bandages over a blue background.

Image source: Johnson & Johnson.

Valuation and stock performance

Johnson & Johnson has done extremely well in the past 12 months, but unfortunately, Merck can't say the same thing for its investors. J&J is up 28% since March 2017, but Merck has lost ground, falling 7%.

From a valuation perspective, it's pretty much impossible to compare the two companies based on recent earnings, because there've been considerable distortions due to tax reform and other one-time impacts. Both companies have elevated trailing earnings multiples that don't reflect their actual valuations.

When you look at future projections of earnings over the near term, you can get a much better picture. Merck has the more attractive valuation, trading at just 12 times forward earnings. J&J's forward multiple of 15 is markedly higher, and that gives Merck the edge -- which is reasonable given its recent share-price swoon.


Dividend investors like high yields, and Merck has also done a better job of delivering the goods on that front. Merck's current dividend yield is 3.51%, which is about a full percentage point higher than Johnson & Johnson's 2.56% yield right now.

One area where Johnson & Johnson excels, though, is in consistent dividend growth. The healthcare conglomerate is a Dividend Aristocrat, having managed to boost its payout annually for 55 straight years. By contrast, Merck has had only a seven-year streak of dividend growth, having gone through a nearly decade-long stretch of keeping its dividend constant. The amount by which J&J has raised its dividends over the past 10 years is more than triple Merck's increase. That makes the comparison fairly even, as some will prefer Merck's higher yield currently, while others will like the longer-term prospects for dividend growth that J&J offers.

Growth prospects and risk

Even though the two companies have different scopes of business, it's the pharmaceutical arena that has been the biggest driver of performance for both of them. Johnson & Johnson has six major blockbuster drugs that are helping to carry a lot of the burden of producing growth for the overall company, with four of them having seen sales increases of 10% or more during 2017. A large pipeline of candidate drugs has grown both organically through internal development and strategically through acquisitions, and both sources have the capacity to produce valuable treatments in the future. Like all pharmaceutical companies, J&J faces the prospective loss of patent protection on key drugs that will eventually lead to falling sales due to competition, and the medical devices and consumer segments haven't been able to keep up with the pace of growth on the pharmaceutical side. Johnson & Johnson is making efforts to squeeze more gains from all of its businesses, but the results so far have been sluggish.

Merck has had to deal with its own challenges in pursuing its top opportunities. In its fourth-quarter financial report, the drug giant reported solid earnings on an adjusted basis, but sales growth was sluggish. In particular, the loss of patent protection on key cardiovascular drugs has led to big sales losses, and pricing pressure on vital diabetes treatments like Januvia has caused their revenue to drop from prior-year levels. The success of Keytruda has been able to overcome some of these downward pressures from elsewhere in the business, and a promising pipeline could contribute to future success as well. Yet rising competition across its key focus areas is likely to put even more obstacles in Merck's growth path in the future.

Even with its problems, Merck looks like it has the edge over Johnson & Johnson. With a higher current yield and a greater margin of safety on the valuation front, Merck stands a better chance of seeing its stock rebound from recent difficulty than J&J has of adding to its already impressive gains recently.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.