Johnson & Johnson (JNJ) and Procter & Gamble (PG) are huge consumer goods companies, with one or the other likely owned by most well-diversified dividend investors.
With PG’s dividend yield of 3.5% slightly more than JNJ’s 2.9% yield, the former might be seen as the superior dividend investment of the two.
However, that’s not exactly true.
How JNJ and PG Compare
JNJ and PG stock both trade at earnings multiples that are consistent with market averages. Neither have attracted great interest this year due to currency woes, and both have significant revenue and profit losses. However, if you remove the losses from currency, which is historically volatile and likely to rebound, one company is clearly superior.
The following shows year-over-year organic sales performance (minus currency impacts) for each company’s last six calendar quarters.
| Procter & Gamble | Johnson & Johnson | |
| Q2-2014 |
3% | 9.4% |
| Q3-2014 | 2% | 5.8% |
| Q4-2014 | 2% | 3.9% |
| Q1-2015 | 1% | 3.1% |
| Q2-2015 | 1% | (1%) |
| Q3-2015 | (2%) | 0.8% |
Clearly, both companies have seen a slowdown in recent quarters, especially JNJ stock as compared to 2014. But still, in looking at Johnson & Johnson versus Procter & Gamble, it is obvious that the former is the faster growing of the two companies.
JNJ Steals Share From PG
With that said, Johnson & Johnson may be known as a consumer goods company but 80% of its revenue is created outside that industry, in pharmaceuticals and medical devices. This creates diversity, giving investors access to three large segments of the market with one single investment.
Nevertheless, Procter & Gamble is largely seen as one of the safest investments in the market, having 21 brands with a billion dollars or more in annual revenue and 59 consecutive years of dividend increases. While true, PG stock troubles aren’t entirely macro related, as it seems that JNJ is stealing some market share.
During this last quarter, Johnson & Johnson’s Consumer division sales rose 3.1% excluding currency, which includes a near 9% hike here in the U.S. That’s much better than Procter & Gamble performed, and drove Johnson & Johnson’s growth in the third quarter. This should be a concern for PG stock owners.
Pharmaceuticals Is a Growth Driver, Not a Concern for JNJ Stock
In regards to JNJ stock, the sales weakness is driven by poor performance in pharmaceuticals, a big surprise given that this used to be its growth driver. However, its 0.3% decline in worldwide pharmaceutical sales (excluding currency impact) was caused by mostly one drug — Olysio.
Olysio was one of JNJ’s best selling drugs last year, but the launch of Gilead’s (GILD) Harvoni wiped out its sales, going from nearly $800 million in the third quarter last year to $79 million in sales for Q3 this year.
Meanwhile, Stelara’s sales of $613 million grew almost 20% in constant currency, while Simponi and Invokana’s sales of $380 million and $340 million with growth of 39.6% and 97.3%, respectively, now have blockbuster sales status on a forward 12-month basis.
Lastly, Imbruvica remains a huge catalyst moving forward. It created revenue of $184 million versus $56 million last year. Johnson & Johnson gets 50% of the sales and 60% of the profits for the blood cancer drug. Last year, AbbVie (ABBV) paid $21 billion to acquire Pharmacyclics, and consequently 50% of Imbruvica’s revenue and 40% of its profits. If that stake is worth $21 billion, then what’s Johnson & Johnson’s worth to JNJ stock? This is a game-changing drug that could very well top $9 billion in worldwide sales at its peak, and is nowhere close to that figure right now.
Let’s Talk Dividends
The bottom line is that JNJ’s Pharmaceutical unit will be just fine, and it’s this diversification, coupled with its growing consumer business, that makes it superior to PG stock. JNJ stock is slightly cheaper than PG stock at 19 vs. 20 times free cash flow, but beyond that, JNJ also has more room to increase its dividend.
Procter & Gamble’s $0.66 quarterly dividend will cost the company nearly $7.2 billion over the next year. That’s nearly 85% of PG’s net income over the last year, whereas JNJ pays out only 50% of its profit on dividends.
This suggests that JNJ stock has much more dividend upside long-term, and collectively with a cheaper stock, a more diversified business and a growing consumer segment with a bullish outlook for its pharmaceutical segment, it is clear that JNJ stock is the best option moving forward.
As of this writing, Brian Nichols owned shares of JNJ.
