Perhaps no blending of words applies to the pharmaceutical industry better than "frenemies" -- the combination of "friends" and "enemies." The word accurately describes the relationships of quite a few big pharma companies, including two of the biggest: AbbVie (ABBV 0.92%) and Johnson & Johnson (JNJ 1.02%).
The two giant drugmakers partner on one of the hottest cancer drugs on the market, Imbruvica. They also compete in multiple areas. One of these stocks, though, appears to be a much better pick for investors right now. Here's how these two frenemies compare.
The case for AbbVie
The first reason to buy AbbVie is its growth prospects. Wall Street expects the company to grow earnings by 16% annually on average over the next five years. A key driver for this growth will be AbbVie's strong current lineup of products.
Although Humira faces biosimilar competition in Europe later this year, it's still likely to reign as the top-selling drug in the world for years to come. But AbbVie's primary sources of growth from its current lineup of approved products will be cancer drugs Imbruvica and Venclexta, hepatitis C drug Mavyret, and endometriosis drug Orilissa. All of these drugs except Mavyret should benefit from expansion into new indications.
AbbVie's pipeline, which market research firm EvaluatePharma ranked as the second-best in the industry, is even more important to the company's growth. Humira could soon be joined by two new immunology blockbusters, risankizumab and upadacitinib. AbbVie hopes to win approval for its late-stage cancer drug, veliparib.
The second reason to buy AbbVie stock is its valuation. AbbVie's shares currently trade at less than 11 times expected earnings. Factoring in the company's strong growth prospects over the next few years makes its valuation look even more attractive.
Last but not least, there's the dividend. AbbVie's dividend yield stands at 4.1%, one of the highest among big pharma stocks. Tthe company has increased its dividend by 140% since 2013, making AbbVie's dividend one of the fastest-growing dividends on the market.
The case for Johnson & Johnson
Does Johnson & Johnson beat AbbVie on growth prospects, valuation, and dividend yield? No, no, and no. Wall Street thinks J&J will increase earnings by around 8% annually on average over the next five years. The stock trades at 15 times expected earnings, and J&J's dividend currently yields 2.74% -- solid, but not as good as AbbVie's yield.
However, there is a compelling argument for buying Johnson & Johnson stock. J&J is one of the most diversified and steady investments in healthcare that you can find.
Johnson & Johnson is a global leader in three different areas of healthcare: consumer health, medical devices, and pharmaceuticals. Last year, these three segments generated $13.6 billion, $26.6 billion, and $36.3 billion, respectively. These segments consist of more than 260 operating companies doing business in nearly every country across the world.
Thanks to these businesses, Johnson & Johnson is a cash-generating machine. The company's levered free cash flow over the last 12 months totaled $17.8 billion. J&J uses that cash to further solidify its market position through investing in research and development and by making strategic acquisitions.
These investments help make J&J one of the most stable pharma stocks around. The stock's beta value, an indicator of volatility, stands at 0.6 -- a little over half that of AbbVie's. There aren't many stocks that have been around since 1887 and still rank among the largest companies in the world, but Johnson & Johnson does.
This stability has enabled J&J to achieve one of the most enviable dividend track records on the market. The company has increased its dividend for 56 consecutive years, an accomplishment that makes J&J one of the top members of the elite group of Dividend Aristocrats.
I don't think you can go wrong over the long run by buying Johnson & Johnson stock. It's one of the bluest of the blue-chip stocks -- and deservedly so. However, in my view, it's hard to top AbbVie's total package.
There has been some negativity recently about the potential for Humira's sales to be hurt by U.S. regulatory changes related to biosimilars and drug rebates. AbbVie's management thinks these concerns are overblown, and I agree. The company has plenty of time for its other drugs to start picking up the slack from Humira. At least for the next few years, I think AbbVie stock will generate better total returns for investors than J&J's will.