This year's release of Godzilla vs. King Kong is the story of two icons pitted against each other. Although it's unlikely to win any highbrow awards for drama, it can still be entertaining to imagine a couple of heavyweights going toe to toe.
With that in mind, I set out to compare two champions in the healthcare industry -- Johnson & Johnson and Pfizer. They are two of the oldest, largest, and most respected companies in the world. But they're taking very different approaches to deliver for shareholders. Here's how the prospects for these two behemoths stack up against one another.
Image source: Getty Images.
They're approaching the future very differently
Most people are aware that both companies successfully developed a vaccine for COVID-19. But they're similar in a lot more ways than that. They both trace their founding to the 19th century. With market caps of approximately $462 billion (JNJ) and $271 billion (Pfizer), they're the two largest U.S.-based pharmaceutical companies.
The pair also distribute robust, reliable dividends. Pfizer yields 3.22% and will soon pay shareholders for the 331st consecutive quarter. It has also raised its dividend for 11 straight years.
Johnson & Johnson can top that. Although its yield is lower at 2.42%, it's raised its distribution for 59 consecutive years.
Despite looking similar for much of the recent past, the two are diverging when it comes to strategy. Pfizer's CEO Albert Bourla has made no secret of his desire to return the company to its scientific roots. He's looking to build an innovation machine that can develop best-in-class drugs for some of the world's most troublesome diseases.
To that end, he has jettisoned the generic and off-patent drugs in a deal that created Viatris. He also gave control of its consumer-health unit to GlaxoSmithKline through a joint venture.
Johnson & Johnson is taking the opposite approach. Rather than focus on one area, the company has embraced its role as a healthcare conglomerate. Its three segments -- pharmaceutical, medical devices, and consumer health -- span virtually the entire healthcare industry. It offers investors a stable, diversified company that grows slowly but adds ballast to a portfolio when the winds of market volatility blow.
Key metrics are a toss up
Since the two companies' strategies appear to be very different, it would be reasonable to expect them to trade at different valuations. That's not the case. Although they each ebb and flow over time, the 10-year charts of price-to-sales (P/S) ratios aren't that different.
P/S Ratios data by YCharts.
Pfizer's success with Comirnaty -- its COVID-19 vaccine -- might cloud the comparison. But relative valuation isn't usually the deciding factor. The stable and growing dividend is generally the main attraction for investors in the two blue chips.
One way to measure a company's ability to keep raising its dividend is the payout ratio. It's the percentage of earnings paid out to shareholders. Calculating that from before and during the pandemic, we can see that they both have ample profits to keep upping the distribution.
| Company | Payout Ratio 2018 and 2019 | Trailing 12 Months |
|---|---|---|
| Johnson & Johnson (JNJ +0.75%) | 65% | 62% |
| Pfizer (PFE +0.91%) | 59% | 66% |
Data source: Morningstar.
Wall Street hates uncertainty
Another difference between the two companies is who holds the top job. Bourla took over as CEO of Pfizer at the start of 2019. Before that, he served as the chief operating officer for a year. His vision for Pfizer has been clear from the beginning, and he has executed on it. Regardless of whether an investor agrees with his strategy, a shareholder knows exactly in which direction the company is heading.
In the past few days, Johnson & Johnson's CEO Alex Gorsky announced he will be exiting the top job at the end of the year. He has served in the role since 2012. His tenure has been marred by lawsuits, including those tied to the U.S. opioid crisis -- and many are pointing to the Janssen unit he ran beginning in 2001. The company's stock price has climbed 166% under his stewardship. That trails the S&P 500 index, which has returned 258%. Despite offering to contribute $5 billion to settle the opioid suits, the company could still face challenges.
It has historically taken a defiant stance when it comes to litigation. That choice often pays off. It also leaves it open to multibillion-dollar jury awards when it loses. His successor will have to deal with the outstanding legal issues.
Who wins between Godzilla and King Kong
The choice between Pfizer and Johnson & Johnson comes down to a personal preference. They're both large, stable companies paying healthy and growing dividends. They each benefit from dozens of drugs, many generating billions in annual sales.
For one, it's a pivot toward scientific discovery. That could bring higher growth, but it comes with more risk. For the other, there's stability in diversification.
But risk can come in many forms. In the case of Johnson & Johnson, it's litigation and leadership. For that reason, I have more confidence in Pfizer in this battle of heavyweights.
