You won't find many if any blue-chip healthcare stocks that are "bluer" than Abbott Laboratories (NYSE:ABT) and Johnson & Johnson (NYSE:JNJ). Both companies have been around since the late 19th century. Both are Dividend Aristocrats with decades of consecutive dividend increases.
But Abbott Labs and Johnson & Johnson have different business dynamics at work. Which of these two healthcare stocks is the better pick for investors? Here's how Abbott Labs and J&J compare in three key areas.
Abbott Labs has been the bigger winner by far when it comes to revenue and earnings growth in recent quarters. The company's momentum has been boosted by its super-successful Freestyle Libre continuous glucose monitoring (CGM) system and other new product launches. These new products should continue to drive Abbott's revenue and earnings higher in the future.
Sales for Freestyle Libre are picking up momentum. This growth is likely to accelerate once Abbott wins U.S. approval to market its second version of the system, which includes optional alarms to warn patients when glucose levels are out of range. Abbott is also poised to benefit as its continues to extend the functionality of its Alinity laboratory diagnostics products.
On the other hand, Johnson & Johnson's growth is slowing. The company's Q4 sales increased by only 1% year over year. J&J's top-selling drug, Remicade, faces competition from biosimilars. Its consumer healthcare business has struggled in international markets.
J&J does have products that should fuel future growth. Cancer drugs Imbruvica and Darzalex are high on that list. The company also is taking the robotic surgical systems opportunity seriously, recently announcing that it's buying Auris Health for $3.4 billion.
Wall Street analysts project that Abbott will grow earnings at a significantly faster rate than Johnson & Johnson will over the next five years. That's probably an accurate assessment. However, it's possible that strategic acquisitions by either company could impact growth prospects.
There are two key things you need to look at when it comes to dividends -- yield and sustainability. Johnson & Johnson is the clear winner over Abbott Labs in the former category. The healthcare giant's dividend currently yields 2.6% compared to Abbott's yield of only 1.65%.
Both Abbott and J&J have great track records of paying and increasing their dividends. Abbott has boosted its dividend for 47 consecutive years. J&J has increased its quarterly dividend for 56 years in a row.
Abbott Labs' payout ratio of 85% is higher than J&J's payout ratio of 63%. However, neither company appears to be in any danger of ending its streak of dividend increases.
By several metrics, Abbott Labs is significantly more expensive than Johnson & Johnson. Abbott stock trades at nearly 22 times expected earnings, while J&J's shares trade at only 15 times expected earnings. On one of the best valuation metrics, enterprise value-to-EBITDA, Johnson & Johnson is much more attractive than Abbott with multiples of 13 and 21, respectively.
However, when growth is factored in, the two healthcare stocks are basically tied. J&J's price-to-earnings-to-growth (PEG) ratio is 2.33 compared to Abbott's PEG ratio of 2.28.
If you've been keeping score, Abbott clearly won in one category (growth prospects) while Johnson & Johnson clearly won in another (dividends) and appears to also have an advantage in valuation. So is J&J the better stock? It depends on what's most important to you.
Value investors probably won't be enamored of either stock. While neither Abbott Labs nor J&J are extremely expensive, they're not exactly cheap, either.
For investors primarily seeking income, Johnson & Johnson is the better pick. I don't think that Abbott will catch up with J&J on dividend yield anytime soon.
Growth investors will probably prefer Abbott Labs. The company's Freestyle Libre CGM system and other new products appear to give the company a clear advantage over J&J, especially as it continues to face falling sales for Remicade.
What about the overall best pick? I'd go with Abbott. Its growth prospects combined with a respectable dividend yield should enable the stock to deliver total returns in excess of Johnson & Johnson over the next few years. That being said, I think that conservative long-term investors would be in good shape going with either of these blue-chip healthcare stocks.