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3 Stocks We Like More Than Johnson & Johnson

By Evan Niu, CFA, Sean Williams, and Brian Feroldi – Mar 11, 2016 at 3:40PM

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Here are a few names that could appeal to investors.

Image source: Johnson & Johnson.

Johnson & Johnson (JNJ 1.08%) is a perennial favorite among investors, thanks to its long history and reliable dividend payouts. The company operates a plethora of consumer brands and has been able to withstand the test of time.

That being said, it is possible to find stocks that might be more appealing in more ways than one.

Brian Feroldi: It's hard for me to name a stock that I like more than Johnson & Johnson as the company is so well diversified that it's arguably one of the safest stocks that investors can purchase today. However, one stock that I like more than JNJ at the moment is biotech blue chip Gilead Sciences (GILD 2.41%), as its trailing P/E ratio of roughly 7 is far less than what Johnson & Johnson is currently fetching on the markets (around 19). That makes me think that Gilead's stock has more upside potential and is the better buy today. 

Gilead's stock is so cheap right now because investors are worried that new competition for its multibillion-dollar blockbuster hepatitis C treatments Sovaldi and Harvoni will significantly hurt the company's business. Those worries have so far been well-founded as Gilead's management team is forecasting that its 2016 revenue will land between $30 billion and $31 billion, which would be a decline from the $32 billion in revenue that it recorded in 2015. That forecast all but confirms that competition is expected to be a big problem for Gilead and is a major reason shares are currently so cheap. 

However, there's reason to believe that Gilead's management team is lowballing its guidance as the company has a long history of under-promising and then over-delivering on results. For example, last year the company guided for full-year 2015 revenue of $26 billion to $27 billion, only to later deliver more than $32 billion in total revenue for the year.

It's also possible that Gilead may be able to retain a leg up on the competition as it is slated to hear from the FDA about its new pan-genotype hepatitis C drug on June 28. If Gilead can gain approval, then it is likely it will be able to retain its dominant position in the hepatitis C market for quite some time. In the meantime, the company is buying back its own stock as fast as it can, which is knocking down its share count quickly, and it's also become a nice income play as its recently raised dividend gives its shares a yield of nearly 2%.

With a far more concentrated product portfolio than Johnson & Johnson, Gilead's business is much more risky and its future is far more uncertain. However, I think that its cheap valuation more than compensates investors for the risks they are taking in purchasing the company's shares, which is why I like Gilead's stock more than Johnson & Johnson's right now.

Sean Williams: Picking a better stock than Johnson & Johnson is akin to finding a needle in a haystack. J&J has a 53-year dividend growth streak, a three-decade adjusted EPS growth streak, a well-diversified business model, and is one of just three companies to maintain a AAA credit rating from Standard & Poor's. But, if forced to pick a better stock, I believe Visa (V 3.80%) could give J&J a strong run for its money.

One of the most attractive aspects of Visa, the dominant global payment processor, is that the global transactions market is still largely untapped. Roughly 85% of transactions are still being conducted in cash, leaving Visa with a sizable expansion opportunity in Africa, the Middle East, and Southeast Asia. Expanding infrastructure into these regions doesn't happen overnight, meaning the addition of merchants and cross-border transactions could trickle in over multiple decades and provide a double-digit growth percentage opportunity.

Another driving force is Visa's role as a payment processing facilitator. Its competitors, American Express (AXP 2.05%) and Discover Financial Services (DFS -0.17%), get the pleasure of being double-dippers during economically strong periods. American Express and Discover lend money to consumers vis-à-vis credit cards and make bank on interest charged, and they reap the rewards from merchants when these cards are used on merchant networks. The downside is that AmEx and Discover are exposed to economic weakness via credit card delinquencies. Visa, as a pure payment facilitator, has no lending capacity to worry about, and thus is only minimally phased by economic slowdowns.

Visa is also working with almost $5.5 billion in net cash, and it produced a healthy $6.8 billion in operating cash flow over the trailing-12-month period. Although Visa's dividend yield of 0.8% isn't on par with J&J 2.82%, there's plenty of opportunity for rapid payout growth, and you'll get a superior growth rate that may be just as recession-resistant as J&J. 

Evan Niu, CFA: Most investors love Johnson & Johnson for its diversified business, and the fact that it's a defensive consumer products company that is able to withstand macroeconomic ebbs and flows. Oh, and the dividend yield of nearly 3% also doesn't hurt. But there's another company that's arguably better in some of these respects: Verizon Communications (VZ 1.67%).

Big Red is even less susceptible to shifts in consumer discretionary spending, since a cell phone bill is one of the last areas where a consumer would cut spending if times were tough; cell phones are such a basic mainstay of modern communication. Many people ditched landlines long ago and rely solely on their cell phones to talk and text with friends and family. That's not to say that Verizon is immune to these types of pressures. Average revenue per retail postpaid account last year fell 4.5% to $152.63, but that's a modest decline and the result of competitive pressures.

But Verizon maintains its top dog position in the U.S. wireless market, and has also been able to keep pricing power for the most part. That's particularly impressive considering the fact that cellular service is mostly a commodity these days, and all of the national networks are pretty comparable in terms of overall performance. The cherry on top is that Verizon's 4.4% dividend yield easily tops Johnson & Johnson's. 

Brian Feroldi owns shares of Gilead Sciences and Visa. Evan Niu, CFA has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences and Visa. The Motley Fool recommends American Express, Johnson & Johnson, and Verizon Communications. 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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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$178.00 (1.08%) $1.91
Verizonmmunications Stock Quote
$38.98 (1.67%) $0.64
Gilead Sciences Stock Quote
Gilead Sciences
$87.83 (2.41%) $2.07
Visa Stock Quote
$217.00 (3.80%) $7.94
American Express Stock Quote
American Express
$157.59 (2.05%) $3.17
Discover Financial Services Stock Quote
Discover Financial Services
$108.36 (-0.17%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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