Investing in the health care sector isn't easy. Where do you start out? From medical device companies to big pharma to small biotech firms bristling with boom-or-bust prospects, it's tough for investors new to this sector to understand the intricacies unique to health care. Fortunately, there's an easy place to look for blue-chip, tried-and-true stocks: the Dow Jones Industrial Average (DJINDICES:^DJI).
Four big-time health care stocks call the Dow home, but which one is the best pick for your money? In this five-part series, we've taken a look at each of the index's four stocks. Starting with Johnson & Johnson (NYSE:JNJ), we moved on to big pharma's Pfizer (NYSE:PFE) and rival Merck (NYSE:MRK) before finishing yesterday with insurance giant UnitedHealth Group (NYSE:UNH). Now the question remains: Just which of these four is the best health care stock on the Dow?
Separating the contenders and pretenders
First, we need to weed out the two contenders facing too many questions to be called the top blue-chip health care pick.
Merck had a successful 2012 despite falling sales, but questions over patent expirations and declining revenues make for a cloudy future. The company's strong sales of diabetes drugs Januvia and Janumet have Merck looking up, but the losses from generic competition to Singulair -- not to mention expirations facing other top sellers, such as Nasonex and Vytorin, which are scheduled to hit in the near future -- will weigh on the company's gains.
Merck boasts a decent pipeline anchored by future potential blockbusters like suvorexant and odanacatib, but with little growth from the company's non-pharmaceutical divisions, investors have to wonder whether that pipeline will be enough to stave off the losses from the patent cliff. While this stock offers a fantastic 4% dividend yield that should tempt income investors, there are better health care picks on the Dow.
UnitedHealth also faces a cloudy future, but the situation's out of its control. The advent of health care reform in America will change the health insurance industry as we know it. UnitedHealth is the biggest and best-equipped company in the field to handle such a dramatic change, but only time will tell what ramifications will arise from Obamacare.
While UnitedHealth's launched a number of initiatives to strengthen its position, from boosting its presence in emerging markets to growing its subscription base, the future of this company and industry is dominated by the new law of the land. A lackluster dividend and poor performance over the past year don't help this stock, but until we see just how change plays out, it's hard to recommend UnitedHealth as the top health care stock on the Dow.
On to the runner-up
Now we get into the real contenders for the title, starting with the runner-up, Johnson & Johnson.
J&J's size alone warrants a look: With its various businesses spread out across virtually the entire health care industry, this company is one of the most stable and secure firms in the sector. Johnson & Johnson can take hits -- such as its ongoing hip-recall legal battles -- and keep chugging along without any serious damage. That's important for investors looking for a secure blue-chipper like this, particularly one that sports a quality dividend yield that ranks among the top 10 in the Dow.
Furthermore, Johnson & Johnson's setting up the right moves for the future. Its acquisition of Synthes last year will fuel the company's medical device business for years to come, particularly in the orthopedics market. That market's especially lucrative for investors, considering the rise of obesity rates across the world. Promising pipeline pharmaceuticals, such as rheumatoid arthritis drug sirukumab and diabetes therapy Invokana, offer hope for future blockbuster drugs.
However, J&J's size is also its bane -- and the trait that holds this stock back from being the Dow's top health care pick. While its spread across the sector has made this company one of the Dow's most stable stocks, it's also hindered its growth, as seen in J&J's decent but lackluster performance in the past year. Shares are up, but not enough to make growth investors jump to buy in. Ultimately, J&J's slow-but-steady growth prospects sink its chances from rising to the top.
And the winner is...
Finally, we reach our winner. The Dow's best health care stock is... Pfizer.
It's hard to believe Pfizer tops the list when the company's still dealing with the losses due to Lipitor's patent expiration. But this company has emerged from under the shadow of the patent cliff with a strong portfolio of top-selling drugs, from growing blockbuster vaccine Prevnar-13 that could hit peak sales of up to $6 billion to anticonvulsant therapy Lyrica, which pulled in $4 billion in sales last year and isn't expected to face generic competition until 2018.
Things are looking up for Pfizer in the next few years, and the future's bright with an absolutely colossal pipeline of drugs. Pharmaceutical candidates range across numerous treatment fields, from oncology therapies to neuroscience and immunology diseases and more. This pipeline diversity safeguards Pfizer's pharmaceutical future against a fall in any single field while offering a greater chance at the blockbusters of tomorrow. Recently approved Eliquis, which Pfizer teamed up with Bristol-Myers Squibb (NYSE: BMY) to create, could offer up to total peak sales of $5 billion for the two companies.
Pfizer's smart management also shines. Leadership's knack for intelligent moves that maximize shareholder value -- from the sale of its infant nutrition business to Nestle last year for nearly $12 billion to its spinoff of former animal health unit Zoetis (NYSE: ZTS) -- show that this company's not afraid to take bold moves in the pursuit of returns. Pfizer's focus on pharmaceuticals also offers the growth that could elude bigger, broader competitors like Johnson & Johnson.
Will Pfizer win out in the end? No one can predict the future, but this company's laid the groundwork to reward shareholders more than the Dow's other health care members. Each of these companies offers upside and optimistic points for the future, but only Pfizer has the combination of strong growth prospects, a solid dividend yield, and savvy leadership -- a combination that makes Pfizer the top health care stock in the Dow.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.