Verizon Communications (VZ +0.02%) and Johnson & Johnson (JNJ 0.50%) might seem like an odd pairing, but they actually have a lot in common. They both hold commanding positions in their industries, have strong brand names, produce gobs of free cash flow, and pay monster dividends. These facts make them ideal choices for income-seeking investors who value stability.
But which of these companies is the better choice for investors today?
Growth
Verizon is a dominant telecommunications company that makes the majority of its revenue from its wireless business. The company has spent lavishly to build out the nation's best wireless network and convince consumers that it stands apart from the crowd.
That messaging is important because the U.S. wireless business is largely saturated, and the big wireless providers compete with each other mainly on price, name, and brand. Verizon added more than 1.2 million new wireless customers in the fourth quarter of 2018 alone, so it's fair to say that it's holding its own against arch-rivals T-Mobile, AT&T, and Sprint.
The big opportunity ahead of Verizon is the upcoming transition to 5G wireless networks. This wireless technology promises to be 10 times faster than 4G networks and pave the way for new markets such as self-driving cars and wireless virtual reality.
Verizon is an early leader in the shift to 5G, and Wall Street believes its first-mover advantage will help drive long-term profit growth. Market watchers currently project that Verizon's bottom line will grow by more than 9% annually over the next five years. That's quite impressive for such a gargantuan business.
Image source: Getty Images.
Johnson & Johnson is a healthcare conglomerate that has been a steady-eddy investment for decades. The company makes money from three large business segments -- pharmaceuticals, medical devices, and consumer products -- that tend to balance each other out when any one of them hits a snag.
Johnson & Johnson's pharmaceutical division has been the star of the show for many years. New drugs like Stelara, Darzalex, and Imbruvica are more than offsetting the weakness in Remicade, which is the company's top-seller. The company is also spending lavishly to enter the robotic surgery industry and drive growth in its medical device division.
When taken together, Wall Street believes Johnson & Johnson will grow its earnings by just over 6% annually over the next five years. That's not too shabby in absolute terms, but it falls a bit short of Verizon.
Winner: Verizon Communications.
Check out the latest earnings call transcripts for Verizon and Johnson & Johnson.
Income
Verizon and Johnson & Johnson both pay out steady dividends that have been rising for years.
Verizon currently offers up a mouth-watering dividend yield of 4.4%, which is more than double the yield of the S&P 500 in general. While its dividend doesn't grow all that much, it only consumes about 63% of the company's net income. That makes it look quite safe.
Johnson & Johnson also offers up an above-average yield, but it is "only" at 2.6% right now. J&J's payout ratio of 63% is very similar to Verizon's payout ratio, and it has grown at a much faster rate than Verizon's over the past decade:
JNJ Dividend data by YCharts.
Still, since these two companies have similar payout ratios, I think Verizon's massive yield of 4.4% gives it the edge, here.
Winner: Verizon Communications.
Value
Both of these businesses are mature and are only expected to grow in the single-digits, so Wall Street has priced them accordingly.
Verizon is currently trading for about 16 times trailing earnings and 12.5 times forward earnings. Both of those numbers are much lower than the S&P 500 in general, so there's no doubt that Verizon is a value stock.
Johnson & Johnson is currently trading for about 25 times trailing earnings and 15 times next year's earnings estimates, so it's a little bit pricier.
While both of these businesses are priced attractively, there's no doubt that Verizon is the cheaper stock.
Winner: Verizon Communications.
The better buy
Verizon currently boasts a higher expected growth rate, larger dividend yield, and a cheaper valuation than Johnson & Johnson. That's a triple-combination that's hard to beat.
That doesn't mean Johnson & Johnson should be overlooked. The company operates in a recession-resistant industry and has been paying out a growing dividend for 56 years in a row. That's an incredible accomplishment that makes it a bedrock stock in any income investor's portfolio.
However, for this match-up, I think Verizon Communications is the hands-down winner.
