Few industries have the breadth that investors can find in healthcare. Those with a speculative bent can choose drug developers with no sales and only the promise of an interesting candidate treatment in their pipelines. Meanwhile, those who prefer blue-chip stocks can look to the most highly successful companies in the industry's history.

Two of those leaders are Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK). J&J has the broadest possible coverage across the spectrum of pharmaceuticals, medical devices, and over-the-counter products for consumers. Merck drills down more on drug development. Both have medications that save countless lives, but which one makes the smarter investment for would-be shareholders right now? A look at some basic fundamental measures of success can shed some light on that question.

Bottle of Merck's Keytruda next to its box.

Image source: Merck.

Valuation and stock performance

Neither Johnson & Johnson nor Merck has been able to keep up with the strong gains in the broader market, but Merck has done a slightly better job than its rival over the past year. Merck shares have climbed by 9% since August 2017, compared to just a 2% rise for Johnson & Johnson.

In order to compare the two healthcare giants on valuation, it's necessary to look beyond the simplest measures of relative value. Because of the one-time impacts of tax reform and accounting changes, trailing earnings for both companies are artificially low, resulting in triple-digit trailing multiples that are essentially meaningless. Only when you look at future earnings projections can you get a better sense of how the two stocks compare, and the differences are minimal. Merck sports a forward multiple of 15, compared to a slightly higher 16 for the larger J&J. Based on both momentum and relative value, Merck squeaks out a minor win.


For those who seek income, both companies do a good job of delivering dividends to their shareholders. Merck has a slightly higher dividend yield of about 2.8%, but Johnson & Johnson's corresponding figure of 2.6% isn't very far behind.

One thing that dividend investors can appreciate is the consistency that J&J has shown in its payout growth over time. For 56 straight years, the healthcare conglomerate has given shareholders an annual raise, most recently paying a 7% increase in its dividend in May. Merck, on the other hand, has only started making consistent increases within the last decade. Before that, the company found it sufficient to sustain flat dividend payments to its shareholders. The way J&J emphasizes dividend growth is enough to overcome a slight yield deficit, putting the two companies on roughly equal terms on the dividend front.

Growth prospects and risk

Growth is hard to come by for companies the size of Johnson & Johnson and Merck, but the two have done a good job of finding ways to expand. For J&J, a sales gain of nearly 11% showed the staying power of the healthcare conglomerate's key pharmaceutical division. Major acquisitions have played a key role in Johnson & Johnson's long-term growth, and its purchase of Actelion has helped to boost its recent results. Yet despite rising competition for its key drug Remicade, J&J has seen impressive gains from other treatments like psoriasis and Crohn's disease treatment Stelara, Darzalex for multiple myeloma patients, and prostate cancer drug Zytiga. Combined with impressive research-and-development capabilities that have helped to build a solid pipeline, J&J has high hopes for the future, both in the short run and over longer periods of time.

For Merck, pharmaceutical success has combined with future promise to give investors confidence in what's to come. Cancer immunotherapy treatment Keytruda has been an important driver of performance for the pharmaceutical giant, with sales of the drug jumping nearly 90% from year-earlier levels in the second quarter. The free cash flow that Merck is getting from Keytruda and other successful drugs, combined with the benefits of tax reform, has put the company in an unusually strong financial condition to consider strategic moves like acquisitions or partnerships. Merck's pipeline doesn't have the depth that some of its rivals have, but shareholders are hopeful that the company can remedy that situation with greater R&D investment to push Merck back toward the top of the pile among drug companies.

Johnson & Johnson and Merck have a lot of similarities, and their differences on these key measures are pretty small. Because of the headwinds that J&J's nonpharmaceutical divisions have put on the company, I very slightly prefer Merck -- but it's so close a call that it wouldn't take much to make Johnson & Johnson look like the better buy.