Johnson & Johnson or Pfizer: Which Big Pharma Dividend Stock Is a Better Buy?

The healthcare sector has an abundance of attractive stocks for income investors. Big Pharma companies generate hefty cash flows, which allows them to pay high dividend yields to shareholders. They also have the ability to grow profits over time, which means they can raise their dividends each year. Johnson & Johnson and Pfizer Inc. are two of the largest healthcare companies in the world. They are both mega-cap stocks, meaning their market capitalization is above $200 billion. Both stocks have generous dividend payouts. J&J has a 2.7% dividend yield, while Pfizer yields an even better 3.4%. The U.S. healthcare industry faces challenges ahead, but J&J and Pfizer are investing heavily to produce future growth. This means shareholders should continue receiving high dividend payouts along with regular dividend increases going forward. Business Overview Comparison Johnson & Johnson and Pfizer dominate Big Pharma. Johnson & Johnson is a diversified healthcare giant, with large pharmaceutical, medical device, and consumer healthcare businesses. The company generates total revenue in excess of $81 billion per year. Still, Johnson & Johnson has experienced elevated risk in recent months due to a report of possible contaminants in its talc powder. There are approximately 12,000 product liability lawsuits related to its baby powder. There is risk of a large financial penalty, but Johnson & Johnson maintains that its talc powder has not caused cancer. The long-term fundamentals of the company should remain intact, and in the meantime the company is still generating growth. J&J had adjusted earnings per share of $8.18 in 2018, which represented 12.1% growth from the previous year. Organic revenue increased 5.5% for 2018. Pfizer has a different business model than J&J, in the sense that it is far more concentrated. Pfizer is a pharmaceutical pure-play, as it does not have a consumer or medical devices unit. In 2013, Pfizer spun off its animal health business, which now trades independently as Zoetis Inc. . Like Johnson & Johnson, Pfizer performed strongly in 2018. For the fourth quarter, revenue of $14 billion increased 5%. Adjusted EPS of $0.64 increased 3% from the same quarter a year ago. The company's full-year results mimicked the fourth-quarter totals. Revenue of $53.7 billion increased 2% year over year. Pfizer's performance was split between its two major segments. Its innovative health unit's revenue increased 6% for 2018, while essential health revenue declined 5% for the year on an operational basis. Adjusted EPS of $3.00 grew 13% from 2017. Both companies reported double-digit growth in adjusted EPS last year, and both have a positive growth outlook for the years ahead. This is due in large part to their pharmaceutical operations. Growth Catalysts The primary growth catalyst for the healthcare industry is new pharmaceutical products. Whereas Johnson & Johnson's consumer and medical device segments grew revenue by 2% and 1% last year, its pharmaceutical segment grew revenue by 12% in 2018. Consumer products and medical devices are generally slower-growth in nature, while pharmaceutical products are major drivers of growth. J&J's best-performing areas continue to be oncology and immunology. Oncology sales rose by nearly 25% in constant currency last year, while the immunology segment grew by 10% in 2018. In oncology, multiple myeloma drug Darzalek grew by more than 60%. Another winner is Imbruvica, which grew revenues by more than 38%. J&J's pharmaceutical pipeline is a positive growth catalyst. The company has a robust pipeline of new products. Its portfolio includes 26 platforms or products with over $1 billion in annual sales. Similarly, Pfizer's growth is the result of significant investments in its pipeline. In its innovative health unit, where most of its growth products are located, flagship products Eliquis grew 31% while Xeljanz sales rose 37%. Going forward, Pfizer sees the potential for approximately 25-30 significant product approvals through 2022, of which up to 15 have the potential to be blockbusters. It expects seven of the 15 to receive approval by 2020. Pfizer has a very strong oncology portfolio. The company has 13 oncology products in Phase I of development, with another 4 in Phase II and 6 in Phase III. Dividend Analysis Investors looking for market-beating dividend yields could consider Johnson & Johnson or Pfizer. Both stocks provide dividend yields well above the 1.8% average yield of the S&P 500 Index. J&J and Pfizer currently yield 2.7% and 3.4%, respectively. One key difference between the two stocks is their history of raising dividends. Pfizer cut its dividend in 2009, in part to help the company absorb the massive acquisition of Wyeth. While Pfizer has resumed growing its dividend in the years since, the dividend cut tarnished Pfizer's track record. On the other hand, Johnson & Johnson is one of the strongest dividend growth stocks in the entire market. J&J has increased its dividend for over 50 years in a row. Not only is J&J a member of the Dividend Aristocrats, it is also a member of the even more exclusive list of Dividend Kings. Both companies have sustainable dividends. J&J has an expected dividend payout ratio of 42% for 2019, compared with Pfizer's 50% payout ratio. In both cases, their dividends are secure. Final Thoughts Johnson & Johnson and Pfizer are similar companies, in that they are both mega-cap healthcare stocks. However, they have significantly different business models. J&J is more stable than Pfizer, due to its steady consumer and medical devices franchises, while Pfizer could potentially have greater growth potential due to its large drug pipeline. Their capital allocation programs also differ. J&J has a slightly lower current yield than Pfizer, but it has a much longer history of uninterrupted dividend increases. Pfizer is the better stock for income investors looking for higher yields right now, while J&J is the better dividend growth stock. Johnson & Johnson is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells JNJ? Learn more now.

Johnson & Johnson or Pfizer: Which Big Pharma Dividend Stock Is a Better Buy?

Healthcare giants Johnson & Johnson and Pfizer offer a tough choice for dividend investors seeking the best returns.

Columnist Conversation

This Weekend on Real Money

Wednesday Morning Fibocall for 1/13/2021

Tuesday Morning Fibocall for 1/12/2021

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.