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Better Buy: AbbVie vs. Johnson & Johnson

By Keith Speights - Apr 1, 2016 at 8:23AM

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In this battle of relatively new vs. well established drugmakers, which is the better choice for long-term investors?

Investors have made a lot of money from Big Pharma stocks over the past few years. Two of the biggest winners have quite different backgrounds. AbbVie (ABBV 0.73%) is a spin-off less than four years old. Johnson & Johnson (JNJ 1.09%) has been around since Grover Cleveland was president. But that's the past. Which of these two stocks has the brighter future? Here are arguments for both AbbVie and J&J. 

The case for AbbVie
Few pharmaceutical stocks have performed as well as AbbVie since the company was formed in 2013. AbbVie's share price climbed over 60% after Abbott Labs spun off its proprietary pharmaceuticals business as a new entity.

Dividend-seeking investors should particularly like AbbVie. The company's dividend yield currently tops 4%. And while the nice yields for some big drugmakers come with scary payout ratios, that's not true for AbbVie. Its payout ratio is just over 64%.

AbbVie's past success has been powered largely by one product -- Humira. The multi-indication anti-inflammatory drug racked up sales of $14 billion last year, reflecting a healthy year-over-year gain. 

There's more to AbbVie than just Humira, though. Hepatitis C drug Viekira Pak contributed $554 million in revenue for 2015 in its first year on the market. New cancer drug Imbruvica made another $343 million for AbbVie. A couple of other drugs, Creon and Lupron, saw double-digit percentage growth last year with combined sales of $420 million.

AbbVie also claims 17 clinical trials in phase 3. Some of those are for Imbruvica targeting additional indications, but most are for drugs not yet on the market. 

What's not to like about AbbVie? The biggest risk for the company stems from loss of patent protection for Humira. U.S. patents for Humira expire in December 2016, while European patents expire in April 2018. AbbVie will likely do everything it can to hold off rival biosimilars from entering the market. The company also has a potential replacement for Humira, ABT-494, in a late-stage study. Still, though, any significant dip in Humira's sales would hurt AbbVie.  

The case for Johnson & Johnson
Johnson & Johnson stands among the elite group of so-called "Dividend Aristocrats", which are companies that have consistently increased dividend payments each year for 20 consecutive years. J&J's yield of 2.79% isn't quite as high as AbbVie's. However, its payout ratio of less than 54% is one of the best among dividend-paying Big Pharma stocks.

Unlike AbbVie, J&J's fortunes aren't heavily dependent on one drug. The company's top-selling drug, Zytiga, generated 2015 sales of $2.23 billion, but was followed relatively closely by Invega and Xarelto with sales of over $1.8 billion each. 

J&J also has several rising stars in its portfolio. Imbruvica, which was co-developed by AbbVie and J&J, is making plenty of money for both companies. Sales for type 2 diabetes drug Invokana are soaring. J&J also plans to submit a dozen new drugs for regulatory approval over the next four years, notably including cancer drug imetelstat. 

J&J also doesn't rely only on pharmaceutical sales. The company is truly a healthcare juggernaut, with multi-billion-dollar consumer products and medical device business units. On the negative side, Johnson and Johnson's revenue dropped across the board from 2014 to 2015. All three of the company's business segments reported year-over-year sales declines, much of which was tied to currency fluctuations outside of the company's control. As you might expect, that resulted in lower earnings as well.

Better buy
AbbVie has emerged as a major success story over the past few years. However, I think the advantage in a head-to-head battle goes to Johnson & Johnson. If I had to sum up why J&J is a great pick in one word, that word would be "stability". 

It's quite likely that you, your parents, your grandparents, and probably your great-grandparents bought products made by Johnson & Johnson. J&J has increased its dividend not just the 20 consecutive years requires to join the dividend aristocrats club; the company has bumped up its dividend payment every year for 53 years in a row.

J&J also has a cash stockpile (including cash equivalents and short term investments) of over $38 billion. That's plenty to ensure steady dividend payments plus money leftover to scoop up smaller companies that could help with long-term growth when the opportunities arise. Bigger isn't necessarily always better, but in the case of Johnson & Johnson the old saying rings true.


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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$181.40 (1.09%) $1.96
AbbVie Inc. Stock Quote
AbbVie Inc.
$149.11 (0.73%) $1.08

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