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Better Buy: AbbVie Inc. vs. Johnson & Johnson

Image source: Getty Images.

The past year has been a rough one for healthcare stocks. Over the past 12 months, the broad market S&P 500 benchmark has risen about 4.6%, while the iShares U.S. Healthcare index has notched a meager 1.7% gain. Two of the largest holdings in the healthcare index, AbbVie (NYSE: ABBV) and Johnson & Johnson (NYSE: JNJ), are outperforming both benchmarks (up 6.4% and 20.5%, respectively), and investors are right to wonder which is the better buy right now.

Let's pit them against each other to see which stock is better suited to your portfolio.

Stock performance and value

Both stocks have been trading below their respective 52-week highs, but the healthcare conglomerate (Johnson & Johnson) has a big lead on the biopharma pure play (AbbVie), as mentioned above. Bigger gains usually lead to bigger price tags, and this is certainly the case here. At recent prices, Johnson & Johnson shares are trading around 22 times trailing earnings, or about 17 times this year's earnings estimates.

Image source: Getty Images.

While J&J shares are cheaper than the average stock in the S&P 500, AbbVie's stock is a relative bargain. You can scoop up the drugmaker's stock at just 17 times trailing earnings, or about 11 times this year's expected earnings.

Dividend battle

When it comes to returning cash, AbbVie notches some important victories. Since the company's inception at the beginning of 2013, it's raised its quarterly dividend more than 42% to $0.57 per share, which delivers a yield of about 3.8% at recent prices. Over the same period, J&J's quarterly payout increased just 31% to $0.80 per share and offers a less attractive 2.7% yield.

On its own, AbbVie can't hold a candle to J&J's 54-year streak of annual increases. Include its pre-2013 years as part of Abbott Laboratories, though, and AbbVie comes pretty close, with an impressive 44 consecutive years of ever-higher payouts.

On the surface, it seems AbbVie's dividend has more room to grow. Over the past 12 months it's used just 46.4% of free cash flow to make payments, versus 59.2% on the same metric for Johnson & Johnson.

Products and patents

AbbVie has outshined J&J so far, but here's where it begins to lose its luster. Its crown jewel, Humira, has been the world's best selling drug for years, but its growth outside the U.S. has slowed to a crawl. In the first half, U.S. sales grew 29% over the previous-year period, pushing total Humira revenue up 16.2% to an annualized run rate of $15.45 billion, despite the international slowdown.

Unfortunately for AbbVie, its most important U.S. Humira patent expires this year, which could lead to hurricane force headwinds in the near future. The drug comprised 62% of total first half revenue for the company. Management contends a vast portfolio of related patents could keep biosimilar competition from affecting U.S. Humira sales until 2022, but the timing is anybody's guess.

Image source: Getty Images.

AbbVie's second largest growth driver is a blood cancer therapy it sells in partnership with Johnson & Johnson. Imbruvica sales started soaring after it became the first chemotherapy-free treatment option for newly diagnosed patients with the most common form of leukemia earlier this year. AbbVie thinks its share of Imbruvica sales could add $7 billion to its annual top line. That's a big gain, from its current annual run rate of $1.76 billion based on second quarter sales.

Imbruvica's potential is great for both companies, but it's important to note that AbbVie spent $21 billion acquiring its rights to Imbruvica sales, while J&J partnered early with the company that discovered the drug for just $150 million upfront. Yes, Johnson & Johnson's deal also involved subsequent milestone payments, but they clearly got the better price in this arrangement.

Johnson & Johnson also faces biosimilar competition for aging anti-inflammatory drugs, but its income sources are far more diverse. Its relatively stable consumer and medical device segments produce more than a third of the company's pre-tax profit. In J&J's increasingly important pharmaceutical segment, six drugs (including Imbruvica) grew sales by a double-digit percentage over the previous year period, and they're all on pace to top $1 billion in sales this year. 

In the pipe

AbbVie recently earned accelerated FDA approval for Venclexta in a difficult-to-treat group of leukemia patients, and the Agency could see more applications to expand its use in the near future. Marketed in partnership with Roche, Venclexta could top $2 billion in annual sales, if ongoing studies convince the regulator to expand the drug's addressable patient population.

Johnson & Johnson recently submitted an application for rheumatoid arthritis treatment sirukumab to the FDA. The candidate significantly reduced joint damage in a trial supporting its application, and it could become the company's next billion dollar drug. A little further out, J&J has 10 more late-stage candidates lined up for applications over the next few years.

While J&J has plenty of potential growth drivers, moving the needle forward isn't easy for a company with thousands of moving pieces that contributed $70.88 billion to its top line over the past four quarters. If you hate checking your portfolio, then go with the conglomerate. If you can handle several years of anxiety while AbbVie tries to keep Humira sales from collapsing, though, it's the better buy right now.

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Cory Renauer owns shares of Johnson and Johnson. You can follow Cory on Twitter

or connect with him on LinkedIn for more healthcare industry insight.

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