Verizon Communications (VZ 1.03%) and Johnson & Johnson (JNJ 0.47%) are good defensive stocks for volatile markets. Verizon is the second-largest wireless carrier in the U.S. after AT&T (T 1.61%), and J&J is one of the world's top makers of pharmaceuticals, medical devices, and consumer healthcare products.
Verizon and J&J have both generated total returns of over 200% over the past decade, buoyed by a steady stream of generous dividends. But looking ahead, is one of these blue-chip stalwarts a better overall investment?
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Verizon's strengths and weaknesses
Verizon generated 71% of its revenue from its wireless business, which sells devices and services, last quarter. The rest was split between its smaller wireline business, which includes its broadband, phone, and Fios video services, and Verizon Media, which houses the remnants of AOL and Yahoo's internet assets.
Verizon generated 69% of its total revenue from the consumer market (both wireless and wireline) last quarter, while the business market accounted for 24%. Unlike AT&T, which acquired Time Warner for $85 billion two years ago, Verizon isn't trying to become a media titan.
Both the consumer and business segments face macro headwinds: The consumer unit faces slowing smartphone sales, longer upgrade cycles, and COVID-related store closures, while its business unit is struggling with lower spending from pandemic-stricken small- to medium-sized businesses, which was only partly offset by higher revenue from enterprise customers. Verizon's wireless business also faces stiff competition from rivals like AT&T and T-Mobile, which recently merged with Sprint.
J&J's strengths and weaknesses
J&J generated 54% of its revenue from its pharmaceutical segment last quarter. This unit's top drugs include Stelara, a treatment for inflammatory diseases; the blood cancer treatments Darzalex and Imbruvica; and the anti-psychotic drug Invega.
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J&J's medical devices unit, which produces a wide range of surgical, orthopedic, and optical products, generated 29% of its revenue. The remaining 17% came from its consumer healthcare division, which produces well-known products like Tylenol and Band-Aids.
J&J's diversified business weathered many economic downturns before, and the COVID-19 crisis mainly affected its medical devices segment with production delays and postponed surgeries.
But J&J still faces other, broader headwinds. Generic competition throttled sales of former blockbuster drugs like its rheumatoid arthritis treatment Remicade, while a streak of safety issues regarding its medical devices and consumer products -- including Tylenol and its talc-based Baby Powder -- tarnished its reputation.
How fast are Verizon and J&J growing?
Verizon's operating revenue rose less than 1% to $131.9 billion last year, as its growth in service revenue offset its declining hardware sales. Its adjusted EPS rose 24% as it reined in its spending.
Verizon originally expected its operating revenue to rise by the low-to-mid single digits this year, with 2%-4% growth in adjusted earnings. But it withdrew its revenue guidance in April due to the COVID-19 crisis, and reduced its adjusted EPS forecast to -2% to 2% growth -- warning its near-term headwinds wouldn't wane anytime soon. Analysts expect its revenue and earnings to decline by 4% and 1%, respectively.
J&J's reported revenue rose less than 1% to $82.1 billion in 2019, but its adjusted operational sales -- which exclude divestments, acquisitions, and currency fluctuations -- grew 4.5%. Its adjusted EPS rose 6%.
J&J previously expected its adjusted operational sales to rise 5%-6% in 2020, and for its adjusted EPS to grow 3.1%-4.8%. But in April, it lowered its adjusted operational sales guidance to -3% to 0.5% growth, with a decline of 9%-13.6% in its adjusted EPS. Wall Street expects its revenue and earnings to decline 3% and 11%, respectively.
Those near-term forecasts look grim, but Verizon and J&J are both expected to post positive revenue and earnings growth next year as the pandemic passes.
The dividends and valuations
Verizon pays a forward dividend yield of 4.3%, and it's raised its dividend annually for 13 straight years. It spent just 57% of its free cash flow (FCF) on its dividend over the past 12 months, and its FCF rose 26% year-over-year last quarter.
That stable FCF growth can be attributed to the steady returns from its wireless subscriptions, which were locked in with contracts and offset its slower hardware sales throughout the pandemic. Verizon's stock is fairly cheap at 12 times forward earnings.
J&J pays a forward yield of 2.8%, and it's raised its dividend annually for 58 straight years -- making it a Dividend Aristocrat of the S&P 500, meaning it's raised its payout for at least 25 straight years.
J&J spent just 51% of its FCF on its dividend over the past 12 months, and its FCF stayed nearly unchanged annually at $3 billion last quarter thanks to the stable returns of its pharma and consumer healthcare units. J&J's stock also looks reasonably valued at 19 times forward earnings.
The winner: Verizon
Verizon and J&J are both great stocks to buy and forget. But if I had to pick one over the other, Verizon's higher yield, lower valuation, and milder COVID-related declines clearly make it a stronger defensive stock for this unpredictable market.
