Last June, I compared Verizon (VZ 1.78%) to Johnson & Johnson (JNJ 0.70%) and declared that Verizon's higher dividend yield, lower valuation, and milder pandemic-related headwinds made it the better buy.
Since I made that call, Verizon's stock price has stayed nearly flat as J&J's stock price rose more than 15%. Let's see why J&J outperformed Verizon, and whether or not that trend will continue throughout the rest of 2021.
How did the pandemic affect both companies?
Verizon already faced three major challenges prior to the pandemic. First, longer upgrade cycles were throttling sales of new smartphones.
Second, T-Mobile's (TMUS 0.17%) merger with Sprint, which closed last April, helped it surpass AT&T (T 2.22%) as the country's second-largest wireless carrier, and put it in striking distance of Verizon. That shifting competitive landscape, along with T-Mobile's aggressive "un-carrier" strategy and broad 5G reach, threatened to throttle Verizon's growth.
Lastly, Verizon's smaller pay-TV (Fios) and advertising (Verizon Media) businesses remained weak, as cord-cutters pivoted toward streaming services and advertisers stuck with larger digital platforms.
The pandemic exacerbated those problems as retailers closed down, cash-strapped consumers postponed their purchases of new devices, and advertisers purchased fewer ads. As a result, Verizon's operating revenue dipped 3% in 2020, but its adjusted EPS still rose 2%.
J&J's three core businesses -- pharmaceutical products, medical devices, and consumer healthcare -- were stable prior to the pandemic.
In 2019, its pharmaceutical sales rose as the growth of its new cancer drugs offset the generic pressure on its former blockbuster drugs. Its medical device sales improved as it sold more electrophysiology, advanced surgery, and Acuvue products, and its consumer sales increased as it sold more Neutrogena beauty products and over-the-counter medicines.
J&J's pharmaceutical and consumer businesses held steady throughout the pandemic, but its medical device sales declined as patients postponed non-essential surgeries amid the surge in COVID-19 cases. J&J's revenue still rose 1% in 2020, but pandemic-related disruptions and expenses reduced its adjusted earnings by 7%.
Brighter days ahead
Verizon and J&J both expect their growth to stabilize in 2021 as the pandemic passes.
Verizon expects its wireless service revenue to rise at least 3% for the full year, and for its adjusted earnings to grow 2%-5%. Analysts expect its revenue and earnings to both grow about 4% as consumers upgrade to 5G devices and its smaller businesses stabilize in a post-pandemic market.
Verizon's growth rates are stable, and its stock still looks cheap at 11 times forward earnings. It also pays a forward dividend yield of 4.6%, and it's raised that payout for 14 straight years. That dividend is easily sustainable since it only consumed 48% of the company's free cash flow (FCF) over the past 12 months.
J&J expects its adjusted operational sales to rise 8%-9.5% in 2021, and for its adjusted EPS to grow 17.1% to 19.6%. Wall Street expects its total revenue and earnings to grow 11% and 18%, respectively, as its lagging medical device business recovers after the pandemic. The potential release of its single-shot COVID-19 vaccine later this year could also lift its pharmaceutical sales.
J&J's stock trades at 16 times forward earnings, and it pays a forward yield of 2.4%. It spent just 56% of its FCF on its dividend over the past 12 months, and it's raised its payout annually for 58 straight years -- which makes it a Dividend King of the S&P 500.
Which stock is the better investment?
Verizon and J&J are both solid investments for long-term investors. But the last time I compared these two stocks, I clearly underestimated J&J's strengths and overlooked Verizon's weaknesses.
After taking a fresh look at both companies, I believe J&J will continue to outperform Verizon this year. It has a better-diversified business, it's generating stronger growth, and it's cheap relative to its growth. There aren't enough near-term catalysts for Verizon, and the challenges it faced prior to the pandemic will likely return and throttle its growth.