There's little debate that healthcare goliath Johnson & Johnson (JNJ 1.24%) has become the de facto gold standard among healthcare companies. J&J's Tylenol and Band-Aid brands are household staples, its prescription drugs are among the most widely used on the planet, and its medical devices are common in hospital surgical rooms everywhere. But J&J wasn't always as big as it is today, and that suggests that investors may be well served by keeping an eye on these three companies that our Motley Fool contributors believe could be J&J's in the making.
Source: Novartis.
Cheryl Swanson: If you're looking for a megacap healthcare stock with a solid-gold dividend track record and the kind of steady-Eddy performance that lets you sleep well at night, you can't do better than Johnson & Johnson.
But if you'd prefer a megacap with more tailwinds heading into 2015, thanks to an abundance of late-pipeline potential blockbusters, you might want to look on other side of the pond at Swiss-based Novartis AG (NVS 0.65%).
Of course, no pharma company compares with Johnson & Johnson in terms of diversity. But Novartis' fast-growing consumer eye-care business, as well as a generics business, Sandoz, gives it some cross-segment synergies and helps reduce its earnings volatility.
Where Novartis may have an edge over Johnson & Johnson is in its late pipeline. The biggest near-term opportunity is LCZ696, which Cyde Yancy, former American Heart Association president, called one of the biggest potential advances against heart failures in more than a decade. Novartis' personalized CAR-T cancer therapy is also barreling toward commercialization, with drug CTL019 getting a rare breakthrough status from the FDA.
On the dividend side, Novartis yields 2.85%, and the company has raised its dividend every year since it launched in 1996. That doesn't match Johnson & Johnson's 52-year track record, but hey, we're talking a teenager compared with a hundred-plus-year-old company. Give the kid some time.
LeoSun: Pfizer (PFE 1.10%), which had a rough three years since the patent expiration of its blockbuster cholesterol drug Lipitor in 2011, could eventually post the same steady growth that J&J is known for.
Between fiscal 2011 and 2013, Pfizer's annual revenue dropped 21%, but it aggressively shielded its bottom line by cutting jobs, spinning off and selling business units, and raising prices. As a result, Pfizer's annual EPS improved 213% over those three years. After slashing its dividend in 2009, Pfizer raised its dividend annually and now pays a forward annual yield of 3.5%. Meanwhile, two experimental drugs -- the breast cancer drug palbociclib and cholesterol drug bococizumab -- are potential blockbusters that might offset its Lipitor losses.
Last year, Pfizer reorganized its business into three main segments: global innovative pharmaceuticals, or GIP; vaccines, oncology, and consumer healthcare, or VOC; and global established pharmaceuticals, or GEP. There has been speculation that Pfizer could spin off or sell its sluggish GEP segment and make a massive acquisition (like its failed AstraZeneca deal) to enhance its GIP segment. Last year, Pfizer closed its acquisition of Baxter International's vaccine portfolio to enhance its VOC business.
I believe that Pfizer's aggressive protection of its bottom line, its pipeline of potential blockbusters, and the reorganization and growth of its business segments could eventually make it a solid healthcare investment with steady growth on par with J&J.
George Budwell: Johnson & Johnson is a top healthcare stock because management has consistently been ahead of the curve when it comes to identifying new growth opportunities and richly rewarding shareholders via share buybacks, dividend increases, and the like. AbbVie (ABBV 2.10%), in many ways, is following in J&J's giant footsteps.
Since becoming an independent company in January 2013, AbbVie's executives have raised the dividend on three occasions, keeping the payout well above the sector average (3.04% at current levels) and earning the coveted title of "Dividend Aristocrat" in the S&P 500 Dividend Aristocrat Index (with help from its Abbott Laboratories history). Management has also been aggressive in terms of buying back shares, instituting a new $5 billion repurchase program last October.
Perhaps most importantly, though, AbbVie has been extremely active in its search for future avenues of growth. Last September, for example, the Illinois-based drugmaker signed an agreement with Infinity Pharmaceuticals to develop duvelisib, a Class I PI3K-delta and gamma inhibitor, for treatment of a host of blood cancers. And in a separate agreement, AbbVie agreed to act as the marketing partner for Google's highly speculative venture into the biotech arena, Calico, which is a clinically-oriented company investigating age-related diseases such as cancer and neurodegeneration.
All told, AbbVie has all the hallmarks of a great dividend stock to buy and hold for the long term.
