If there's one health-care stock every investor knows by name, it's Johnson & Johnson (JNJ 0.91%). This industry titan makes everything from consumer health products to medical devices to pharmaceuticals, reaching into every niche of the medical sector. It's a strong dividend stock with a history of stability -- there's seemingly some perk for every J&J investor.
However, growth investors might want to take a look elsewhere. For all J&J does right, it's anything but a fast-growing, chart-topping stock for those looking for the best possible annual returns. While J&J isn't short on financial growth and makes a great foundation for any portfolio, a few key trends should make growth investors think twice before doubling up on shares.
Core businesses, slow growth
J&J is much more than a medicine company, and is far more diverse than its Big Pharma rivals. It is heavily reliant on sales of consumer health products and medical devices. In 2012, these two segments made up more than 62% of all revenue.
Unfortunately for growth investors, these two segments aren't exactly setting the markets on fire. Consumer health sales are a great, stable foundation for risk-averse investors, but there's little growth to be had here: Revenue fell at five of the six consumer health businesses last year, with only oral-care sales remaining flat. With tightening consumer wallets and hospital budgets under pressure, expect that trend to keep up in the near future.
Medical devices can be a great growth driver: J&J proved as much when the company bought orthopedics firm Synthes last year in a $12 billion deal. That acquisition sparked a huge jump in the company's orthopedics revenue. Unfortunately, J&J's most recent earnings report has shown that without the Synthes deal, revenue growth has been elusive for the company's medical device segments.
Orthopedics revenue should continue to grow in the future: Rival Stryker recently posted growing orthopedics revenue despite its troubles with hip implant recalls and pricing pressures in the industry, and age and obesity-related trends should keep demand high for years to come. J&J's other medical device segments haven't been so lucky recently, and slow, steady growth outside of orthopedics looks to stick around for some time as the medical device industry struggles.
If medical device revenue and consumer health sales aren't growing at a good clip, pharmaceuticals can always drive growth. Unfortunately, while J&J's drug business is top-notch, it's not lighting up the markets like a fresh, new biotech firm.
Diluting the blockbuster drugs
J&J's pharmaceutical business is massive, covering everything from oncology to immunology and more. That treatment diversity is a blessing for income investors and shareholders seeking stability in a volatile industry like health care, but for growth investors, it can be a curse.
The company reported strong growth in several promising drugs last year, including more than 300% year-over-year sales growth from likely future blockbuster prostate cancer treatment Zytiga. This wasn't enough to ward off falling sales from patent expirations. Growth slipped from 8.8% in 2011 to just 4% last year, and while the future's bright for J&J's pharmaceutical business with potential future blockbusters such as diabetes-fighting Invokana, this segment's diversity of drugs and therapies dilute the effect of up-and-coming drug candidates on overall growth.
This is a problem that affects Big Pharma companies across the sector, but major firms in pharmaceuticals and biotech have managed to grow significantly while concentrating on smaller, more focused drug portfolios. Consider Biogen Idec (BIIB 0.97%): The firm's considerable focus on multiple sclerosis drugs exposes it to far more risk than Johnson & Johnson's well-diversified portfolio, but it's still a far safer pick than up-and-coming biotech firms with murky futures. That hasn't stopped Biogen shares from soaring more than 59% over the past year, nearly double J&J's performance.
The problem with diversity
All of this adds up to the most important reason why J&J isn't the best bet for growth investors: This company is simply too broad and diversified to realize chart-topping growth for any long period of time.
Other leading firms in the health-care field have caught on. Pfizer (PFE -0.15%) has made some of the strongest moves to concentrate on its core recently, selling its infant nutrition business to Nestle and spinning off its former animal health business, Zoetis (NYSE: ZTS), in order to unlock shareholder value. These moves not only allowed Pfizer to concentrate on its high-growth, boom-or-bust pharmaceutical business, but also, as a secondary effect, made the stock attractive to growth investors by focusing the company's future around a core designed for growth.
J&J's diversification strategy isn't bad business sense, and it's a boon for investors craving stability in a volatile market. The stock's even been one of the best performers on the Dow Jones index this year, as it's outperformed the market. Yet even on the Dow alone, fellow blue-chip health-care rival Pfizer has topped J&J's gains, to say nothing of the many other strong pharmaceutical and biotech companies surging this year. J&J's a great, safe stock for any portfolio to build around, but if you're looking for the best growth in the industry and are willing to take a chance, there are riskier -- and potentially more rewarding -- stocks around the sector than Johnson & Johnson.