Eli Lilly (LLY -0.75%) and Johnson & Johnson (JNJ -1.21%) are among the biggest names in the healthcare industry. Their low-volatility stocks can make these two drug manufacturers attractive buys at a time when the markets are showing lots of instability.
The big question for investors, though, is whether they should go with the larger, more diverse Johnson & Johnson (with its lawsuits and negative press), or the less risky Eli Lilly. Let's compare the two companies to see which one may offer investors the best mix of growth, dividends, and stability for their portfolios.
Johnson & Johnson is strong enough to handle adversity and legal challenges -- for now
With a more than $350 billion market cap, Johnson & Johnson is a top stock in the markets today. The dividend aristocrat has an impressive track record of increasing its dividends consistently for 50-plus years without a break. Currently, it pays investors $0.95 per share every quarter for a yield of 2.7%, which is well above the 2% payout investors can expect from the average S&P 500 stock.
There's also no denying the financial strength of the company, with Johnson & Johnson's operating margin consistently above 20% in each of the past eight quarters. And even with legal costs weighing it down, Johnson & Johnson has remained profitable, with its profit margins only falling below 10% once during that same timeframe.
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Although the company's sales in 2019 were flat from the previous year, what makes Johnson & Johnson a good investment is the diversification it offers. Its pharmaceutical division made up slightly more than half of total segmented sales in 2019. Medical device revenue made up nearly one-third, and the consumer division represented 17% of segmented sales. This strong diversification makes it a safe bet that Johnson & Johnson's top line will remain relatively stable over the years.
Unfortunately, that doesn't mean its stock price will be consistent. Johnson & Johnson has faced lawsuit after lawsuit relating to opioids, vaginal estrogen therapy, an antipsychotic named Risperdal, and perhaps most notably, its talc baby-powder products. On Feb. 6, a judge ordered the company to pay $750 million to four women who developed cancer as a result of using Johnson & Johnson's baby powder. (The company has said it will appeal.) There are many more lawsuits to settle, and with Washington the latest state to go after the company for its role in the opioid epidemic, there's little reason to believe Johnson & Johnson's legal fees will end anytime soon.
Johnson & Johnson is able to weather the storm for now, but as more lawsuits pile on and the fines get larger, it could put the stock, and investors, at risk.
Eli Lilly is still growing, could have a good year in 2020
When compared with Johnson & Johnson, Eli Lilly stands out for a couple of reasons.
First, it isn't facing a barrage of lawsuits, and its name isn't constantly in the press for all the wrong reasons. Secondly, the company is still showing good growth and is coming off a strong fourth quarter that saw its top line grow by 8% year over year. For the full year, sales were up 4% from 2018's tally. Earnings per share (EPS) of $1.64 were also up an impressive 49% from the prior-year quarter. For all of 2019, EPS of $8.89 was more than double 2018's total of $3.13.
Eli Lilly is also expecting more growth to come this year, especially now that its $1.1 billion all-cash acquisition of Dermira is now complete. The acquisition will allow Eli Lilly to expand its portfolio of dermatology medicines. Of key significance is Qbrexza, which treats excessive underarm sweating. In Eli Lilly's most recent quarter, ending Sept. 30, product sales, which are essentially sales from Qbrexza, totaled $10.2 million. That's up 27% from the previous quarter, when its revenue was $8.1 million.
Even on its own, Eli Lilly is still a solid buy. The company's operating margin has also been very strong, staying above 20% in each of its past 10 quarters, and only twice during that time has the bottom line not been in the black. And with the company reporting free cash flow of $3.5 billion in 2019 and consistently generating cash over the years, it's in a solid position to potentially take on more acquisitions down the road.
The company's CEO and chairman, David A. Ricks, continues to expect 2020 to be a strong year for Eli Lilly, stating in the earnings release: "We look forward to continuing this progress in 2020, as our scientists work to expand our portfolio of innovative medicines to offer new treatment options for patients in the areas of diabetes, oncology, immunology, and neuroscience."
Investors should go with Eli Lilly
Johnson & Johnson's stock has struggled in the past year, but even if we look at the past three years, its returns are still nowhere near Eli Lilly's -- or even the S&P 500's:
Data by YCharts.
Investors will be getting a more modest dividend yield of 2.2% with Eli Lilly, and it's been continuously increasing its dividends for just six years in a row, a far cry from Johnson & Johnson's impressive run of more than half a century. However, the healthcare stock more than makes up for that by being a safer buy, one with stronger growth numbers and some exciting opportunities ahead of it. Both stocks trade at similar price-to-earnings ratios of about 26, and although Johnson & Johnson is still a good long-term buy, Eli Lilly gets the edge for growth investors as well as those who are looking for a stable investment they can buy and forget.
