Sometimes, well-run and highly respected businesses such as health-care giant Johnson & Johnson (NYSE:JNJ) just don't make good investments when compared with other companies in the same industry. As is the case with many of the blue chips of yore, J&J's strong outperformance of the market in the past hasn't continued in recent years, with shares of the diversified pharma and medical device stalwart lagging the S&P 500 and the other major indices in the past five years.

The allure of a blue chip like J&J is obviously the perceived stability of sales and the nice 2.3% dividend yield that comes with it, but as of today, 14 Dow components pay a higher dividend yield, including fellow pharmaceutical company Pfizer (NYSE:PFE). Investors looking for a blue-chip pharma that pays a high dividend yield outside the Dow can also look at GlaxoSmithKline (NYSE:GSK) or a host of other large-cap pharmas yielding at least as much as J&J, with either stronger pipelines or a higher rate of earnings growth.

Speaking of earnings growth; J&J has been able to grow earnings per share at double-digit rates in the past couple of years, but much of that growth has come from things such as reduced tax expenditures rather than material improvements to the business. Operating margins have been flat, hovering around the 26% range, and free cash flow has been growing in the single digits in the past couple of years.

Sure, flat operating margins and slow operating-income increases can be forgivable if revenues continue to grow strongly, but sales growth has been anemic in recent years for J&J. The company really has no new drivers of sales growth, save a few risky pharmaceutical products on the horizon. Several key drugs that represented nearly 25% of pharmaceutical sales in 2005, including Procrit and Duragesic, face competition in the form of superior-branded products or generic competition, and as a result, sales growth will be hard to come by in the coming years.

Year

Revenue (billions)

Year-Over-Year Growth

2006 (first nine months)

$39.7

4.6%

2005

$50.5

6.7%

2004

$47.3

13.1%

2003

$41.8

15.3


Another important source of past revenue growth for J&J has been its Cypher drug-coated stent, which accounted for approximately 7% of all revenues in the most recent quarter. But faced with numerous competitors from other well-heeled medical-device companies, even the recent acquisition of Conor Medsystems (NASDAQ:CONR) won't take the pressure off declining sales for J&J's Cordis division -- several recent negative articles in prestigious journals have outlined safety issues and a possible lack of efficacy with the use of stents in general.

The declining Cypher stent sales bring up a good point about the huge unknown nature of the risks attached to shares of J&J, as well as to all large-cap pharma stocks -- the risk of changing clinical practices among doctors and the resulting loss of sales that can result. J&J found itself in just such a position with the rapid decline in sales of its heart-failure drug Natrecor, after a negative journal article about the drug appeared in 2005. So unless you scour the medical journals all the time, it's very hard to see these types of risks coming, which makes shares of the big pharma companies like J&J very time-consuming to research and own. The smaller biotech and specialty-pharma companies are typically much easier to analyze. This aspect alone should make most investors walk away from shares of J&J, and it also brings up the next big risk to the company.

With a market cap of $200 billion, J&J has grown so big that it can no longer acquire its way to faster sales growth. Being primarily a pharmaceutical and medical-device hybrid, J&J is faced with the prospect of either pumping out new blockbuster drugs at a faster rate, or being crippled by the onset of generic competition for its top drugs in a few years. With the other large-cap pharmas such as Pfizer, Merck (NYSE:MRK), and GlaxoSmithKline all armed with billions of dollars on their balance sheet and facing generic competition on many of their top drugs as well, the competition to acquire the most promising drug candidates and other development-stage drug companies will be fierce to say the least.

J&J's dividend does provide investors with some degree of income, but if I wanted a stable source of income, I'd rather put my money in a certificate of deposit or some other bond-like instrument, rather than a health-care stock like J&J's, which comes with so many risks and slowing growth.

Johnson & Johnson and GlaxoSmithKline are current picks of the Motley Fool Income Investor newsletter service. Merck is a former Income Investor pick. Pfizer is a recommendation of Motley Fool Inside Value . Try out any of our investing newsletters free for 30 days .

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy .