Published March 3rd, 2017 by Bob Ciura
The healthcare sector is loaded with great dividend stocks.
This should not come as a surprise since healthcare stocks are stable and generate reliable profits each year.
With their consistent earnings growth, healthcare stocks can pay high dividend yields to shareholders. And, they can raise their dividend payouts regularly.
J&J also holds the distinction of being a Dividend Aristocrat, a group of 51 companies in the S&P 500 with 25+ years of consecutive dividend increases.
You can see the full Dividend Aristocrats List here.
This article will discuss which of the two stocks is the better dividend investment right now.
J&J and Pfizer have adopted different business models.
J&J has large business across the healthcare spectrum, including pharmaceuticals, medical devices, and consumer health products.
Source: 4Q Earnings Presentation, page 1
J&J is more diversified than Pfizer. It has a huge consumer products segment, with many strong brands including Listerine, Band-Aid, Tylenol, and Neutrogena.
All three businesses contributed to J&J's solid performance in 2016.
Meanwhile, Pfizer is virtually a pharmaceutical pure-play. Its biggest segment is Innovative Health, which represents more than half of overall sales.
This segment includes Pfizer's flagship pharmaceutical drugs Ibrance, Eliquis, and Xtandi.
Source: 2016 Earnings Presentation, page 14
J&J's consumer healthcare segment accounted for 19% of its sales last year. Pfizer's consumer business represented just 6% of its 2016 revenue.
Having a large consumer business helps J&J when the pharmaceutical industry struggles, such as last year. Consumer healthcare products are more stable than pharmaceuticals.
J&J's consumer business posted a 4.9% increase in fourth-quarter sales, which was above the company-wide growth rate of 1.7% for the quarter.
2016 was a difficult year for pharmaceuticals due to deflationary pressures on drug pricing.
But Pfizer could see stronger growth going forward, if regulatory risk facing drug pricing eases in 2017 and beyond.
Both companies need to fight off patent expirations to generate growth. The dreaded patent cliff is the biggest risk for pharmaceutical companies.
An example of this is when Pfizer lost U.S. patent protection for cholesterol drug Lipitor, which was once the top-selling drug in the world.
Based on its struggles after losing Lipitor, Pfizer has prepared for future patent expirations by building a well-stocked pipeline.
Pfizer has 43 projects in Phase II and Phase III development.
Source: 2016 Citi Healthcare Conference, page 3
Pfizer has built its pharmaceutical pipeline with huge acquisitions.
In 2015, Pfizer acquired Hospira for $17 billion. Last year, it acquired biotech giant Medivation for $14 billion.
Acquiring Hospira helped Pfizer expand into injectable drugs and infusion technologies, while the Medivation deal boosted its oncology drug portfolio.
For its part, J&J has a smaller pharmaceutical pipeline. It relies heavily on its consumer business, as well as its medical devices unit.
Source: 4Q Earnings Presentation, page 11
Medical devices are highly profitable, but are slower-growth. J&J's medical devices revenue declined 0.1% in 2016.
Therefore, Pfizer's mega-deals in pharmaceuticals could help it generate future growth more quickly than J&J.
To be sure, J&J is catching up in M&A. It recently announced the $30 billion acquisition of Swiss biotech company Actelion.
This deal will give a huge boost to J&J's future drug pipeline. Still, it will take time for the benefits of the acquisition to materialize.
When it comes to a proven history of paying steady dividends, J&J is in a class by itself.
It has increased its dividend for 54 consecutive years. Not only is it a Dividend Aristocrat, but it is also a Dividend King, a group of just 19 stocks with 50+ years of dividend growth.
While Pfizer has grown its dividend steadily for several years, it committed the 'cardinal sin' by cutting its dividend payout.
Pfizer reduced its dividend by half in 2009 to help finance its $68 billion acquisition of Wyeth.
The company has resumed dividend growth since then, but its dividend cut signals the company's willingness to cut the dividend when it deems appropriate.
This adds some element of risk to Pfizer's dividend. J&J's long track record of annual dividend increases gives it the edge here.
Due to their similar growth strategies, Pfizer and J&J have each raised its dividend by 7% per year on average in the past five years.
However, their current dividend yields could be a deciding factor.
Pfizer has a 3.7% dividend yield, which handily exceeds J&J's 2.6% dividend yield. It might not seem like it, but this is a significant difference.
At these yields, a $10,000 investment in Pfizer's stock would generate $370 in dividend income over the next year.
By contrast, an equal investment in J&J's stock would throw off $260 in dividend income.
As such, Pfizer's stock provides approximately 42% more dividend income than J&J.
One reason is because Pfizer has a higher payout ratio. It distributed 53% of its adjusted earnings-per-share in 2016, compared with a 47% payout ratio for J&J.
But the bigger reason is because of J&J's extended share price rally: J&J's stock rose 91% in the past five years, compared with a 61% rise for Pfizer in the same period.
A rising stock price has the opposite impact on its current dividend yield.
This gives Pfizer a big lead in dividend yield, which is one of the most important considerations for a dividend stock.
J&J and Pfizer are both high-quality businesses. They each deserve a place in a dividend portfolio, which made this matchup extremely close.
It depends on what you prioritize in your investments.
If you are looking for stability, recession resistance, and reliable dividend growth, then Johnson & Johnson is the clear pick between these two strong health care corporations.
If you are looking for better valuation and a 3%+ yield, then Pfizer is the better choice.
Pfizer's 2009 dividend cut eliminates it from ranking using the 8 Rules of Dividend Investing, while Johnson & Johnson ranks very well using the 8 rules.