The Best Choice in Healthcare, Period
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Everyone should have some exposure to healthcare/biotechnology in their long-term portfolio. There are many exciting choices, ranging from big pharma to highly speculative biotech companies, so which is right for you? Believe it or not, my favorite for long-term growth and income is Johnson & Johnson (NYSE: JNJ), which has an undeserved reputation for being a boring investment.
About Johnson & Johnson
Johnson & Johnson is one of the largest healthcare companies in the world, with a very diverse product line that includes many well-known brands that can be found in virtually every home in America. Most notably, these include Band-Aids, Immodium, Neutrogena skin-care products, Johnson’s line of baby products, and over-the-counter medications such as Tylenol. However, what a lot of investors don’t realize is that consumer products such as these only account for a small percentage (21%) of the company’s sales.
The majority of J&J’s sales come from the pharmaceutical (38%) and medical devices and diagnostics (41%) segments. Pharmaceuticals produced by J&J include such drugs as Remicade, Procrit, Velcade, and Concerta, all of which sell more than $1 billion per year. Medical devices and diagnostics include sports medicine products, blood glucose monitors (Lifescan), and contact lenses, just to name a few.
Growth Prospects (Include past comparison info)
While J&J is not widely considered an exciting growth company, they have done very well for investors over the past few decades. In fact, after crunching some numbers, I was shocked to discover that a hypothetical $10,000 investment in J&J 20 years ago would be worth $89,888 today, assuming all dividends were reinvested. Compare that to $66,680.73 for the same investment in rival Pfizer (NYSE: PFE) or just $35,662.16 from Merck, both of which are widely regarded as more “exciting” than J&J.
Even though it is an enormous company, J&J strives for innovations, spending almost $8 billion per year on research and development. The company has 17 drugs in the latter stages of development, and I believe this will keep its growth trend alive going forward.
Johnson & Johnson is one of my all-time favorite dividend stocks, and has one of the best records in the market when it comes to raising payouts to shareholders. The stock currently pays out $2.44 annually, or a yield of 3.18%, and the chart below highlights their excellent record of raises.
Despite its excellent track record, J&J trades at just 14 times projected forward earnings of $5.41 per share, which are expected to grow to $5.76 and $6.18 in 2014 and 2015, respectively, or an annual growth rate of around 7%. I feel that this is a very fair price for a company that is very recession-resistant and a stable grower, not to mention the company has over $10 billion in net cash on their balance sheet (cash-debt).
I have already mentioned that I believe J&J to be the best way to play healthcare in a long-term portfolio. However, for valuation purposes, I’d like to take a look at what I consider to be the two closest competitors, Pfizer and Novartis (NYSE: NVS).
Pfizer has grown tremendously over the past decade, mainly through the acquisitions of Warner-Lambert, Pharmacia, and Wyeth. Pfizer produces many well-known prescription drugs, such as Lipitor, Lyrica, and the (in)famous Viagra. Pfizer trades at a seemingly lower valuation than J&J at 11.9 times forward earnings, however the consensus calls for just 4% growth for the next few years. Additionally, Pfizer doesn’t have nearly as attractive of a balance sheet, with almost $40 billion in long-term debt.
Novartis is more diversified, focusing not only on prescription drugs but on consumer products as well. In addition to their well-known prescription drugs such as Diovan and Gleevac, the company also produces the Maalox and TheraFlu product lines. Similar to Pfizer, Novartis trades at just over 12 times forward earnings, and also has a relatively low 5% forward growth rate.
The point of all this is that Johnson & Johnson is the best value for a big pharma stock, and also has the best track record of delivering results for its shareholders. In my opinion, this is the best healthcare play for the next 20 years and beyond.
KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!