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Better Buy: Johnson & Johnson, Pfizer, or Bristol-Myers Squibb?

By Peter Stephens – Mar 14, 2014 at 9:30AM

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Is the relative stability provided by Johnson & Johnson's diversified business model a major advantage when compared to Pfizer and Bristol-Myers Squibb?

Shares in Johnson & Johnson (JNJ) gained a healthy 31.8% in 2013. This outpaced its Dow peer Pfizer (PFE -0.37%), but trailed the stock rise posted by sector competitor Bristol-Myers Squibb (BMY 0.40%).

The big question is this: Is Johnson & Johnson, a diversified health care company, better than Bristol-Myers Squibb and Pfizer? Or is the pharmaceutical focus of Bristol-Myers Squibb and Pfizer a bigger advantage than the relative stability of Johnson & Johnson?

Positive developments
Recent news from Johnson & Johnson has been fairly positive. Earlier this year, the FDA approved its Thermocool Smarttouch Catheter, which provides doctors with contact force stability when applying radiofrequency energy against the heart wall during catheter ablation. This has been shown to improve outcomes, as inconsistent tissue contact could result in incomplete lesion formation, leading to a need for additional treatment. 

In addition, the European Medicines Agency's Committee for Medicinal Products for Human Use also recommended marketing authorization in the European Union for J&J's Vokanamet. This is a treatment for type 2 diabetes that combines canagliflozin and metformin, and could provide blood glucose and body weight reduction without increasing the risk of hypoglycemia.

These two news items highlight the diversity offered by Johnson & Johnson, relative to its peers, as the company is a major player in pharmaceuticals and medical equipment.

Strategy changes
Johnson & Johnson also recently posted a strong set of fourth quarter earnings results. The report showed that the business remains able to deliver top- and bottom-line growth (+4.5% and +5.5%, respectively, when compared to the fourth quarter of 2012) and is progressing well with its strategy to sell off be slower-growing divisions in favor of faster-growing assets.

Bristol-Myers has taken on a similar strategy transition, turning its drug development focus to more profitable treatment areas. For instance, the company recently sold its stake in the diabetes joint venture with AstraZeneca to its partner for $2.7 billion, which will provide Bristol-Myers with further capital to invest in its oncology pipeline.

Johnson & Johnson's 2.9% dividend yield remains above the S&P 500's yield of 1.95%. While this also bests Bristol-Myers Squibb's yield of 2.7%, it remains behind Pfizer's 3.3%. Furthermore, there seems to be greater scope for Pfizer to increase dividends per share, since its payout ratio is just 30%, while Johnson & Johnson's is considerably higher, although still conservative, at 53%. Bristol-Myers Squibb, meanwhile, has the highest payout ratio of the three companies at 90%.

The ratios show that Johnson & Johnson and Pfizer have the scope to be more generous in their shareholder payouts, while Bristol-Myers Squibb may struggle to dig too much deeper. 

Sales and stability
While Pfizer is forecast to barely grow sales in 2014 and 2015, Bristol-Myers Squibb appears to be heading in the other direction. Analysts expect Bristol-Myers' sales to drop 2% this year and another 5% in 2015. In addition, the company's stock (as well as that of Pfizer) is likely to be more dependent upon positive news regarding its pipeline given its high expectations for future growth. Johnson & Johnson, however, has strong, stable growth expectations now and in the future in part because of its more diversified business (40% pharmaceuticals, 40% medical equipment, 20% consumer goods).

Johnson & Johnson looks all set to have a strong 2014 while offering greater stability than sector peers Pfizer and Bristol-Myers Squibb. While all three remain attractive investments, Johnson & Johnson could turn out to be the more consistent performer going forward.

Peter Stephens has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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.

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