It can be hard to evaluate companies in different industries, but investors who seek out diversified portfolios often face the challenge of choosing from high-quality stocks in different sectors. Verizon Communications (NYSE: VZ) has built out the leading U.S. wireless network, doubling down on its bet in recent years by taking 100% control of the network. Johnson & Johnson (NYSE: JNJ), meanwhile, has become a healthcare giant, providing everything from consumer products like over-the-counter pain relief and bandages to prescription pharmaceuticals and sophisticated medical devices.
Both companies face some big challenges, but they also enjoy opportunities for future growth. Given the current market environment, many investors prefer well-known names with businesses they can understand. To help you decide which of these two stocks looks like the better buy right now, you'll find below some key attributes of both Verizon and Johnson & Johnson that will help give you the insight you need to be fully informed.
Image source: Verizon.
Valuation and share performance
Neither Verizon nor Johnson & Johnson has been a standout performer lately, but the telecom company still has an advantage. Verizon's share price has gone up by 5% since June 2017, compared to a 5% decline for the healthcare giant.
Traditional methods of comparing valuation using net income are a bit problematic right now, mostly because one-time distortions to earnings figures make it hard to draw valid comparisons. For example, Johnson & Johnson's earnings have gotten artificially depressed by recent extraordinary items, and that's given the healthcare company an unrealistic trailing earnings multiple of nearly 300. Meanwhile, Verizon got a short-term benefit that cut its trailing earnings multiple to just over 6.
When you look at forward projections for the two companies' bottom lines, the numbers narrow somewhat, but Verizon retains an edge. Johnson & Johnson trades at more than 14 times forward earnings estimates right now, but the telecom company weighs in with a forward multiple of less than 11. At this point, Verizon looks more favorable by these metrics than Johnson & Johnson.
How you judge these two stocks in terms of dividends depends on what's most important to you. If you're only interested in current levels of income, then Verizon has an advantage that J&J can't come close to beating. Verizon has a dividend yield right now in excess of 5%, making it the highest yielder within the Dow Jones Industrial Average. By contrast, Johnson & Johnson pays a healthy yield of 2.6%, which is above the market average but still well below its telecom peer.
Focusing on dividend growth provides a different perspective. Verizon has 13 straight years of dividend increases, including a modest 2% boost last October. Johnson & Johnson just announced a much larger 7% dividend hike, though, and that made its 56th straight annual boost to what it pays to its shareholders.
Verizon pays out about half of its expected earnings to shareholders as dividends, while J&J holds on to a slightly larger proportion of its net income. Those who prefer dividend growth will prefer Johnson & Johnson, but Verizon's big current yield makes it attractive for those who are impatient to start using that income right away.
Growth prospects and risk
Both Verizon and J&J have had to work at solving some fundamental problems in their respective industries. Verizon still stands atop the telecom space in the U.S., but it's currently engaged in a price war that has led to dramatic decreases in what it can charge for wireless plans, and that's putting a crimp in its ability to grow profits. At the same time, the need to upgrade its wireless network to new 5G standards will be a huge undertaking. Interestingly, Verizon appears to want to branch out well beyond its historical telecom focus, embracing some cutting-edge areas like the Internet of Things, smart cities, and broader automation and connectivity services. Those strategic initiatives are a smart way to hedge bets on what remains its biggest cash cow, and investors can hope both that wireless will go well and that new businesses will emerge from Verizon's efforts.
For Johnson & Johnson, the most important area lately has been the pharmaceutical business. With a combination of established blockbuster drugs and up-and-coming pipeline candidates, J&J; hopes to be able to find ongoing new opportunities for its fastest-growing segment. Yet a combination of globalization and competition has made it harder for Johnson & Johnson to expand with consumer products, despite the company's worldwide brand awareness. The Actelion acquisition has been instrumental in promoting further growth efforts in pharmaceuticals, and that area still seems to have the highest potential for the foreseeable future. If that trend continues, it's not beyond the realm of possibility that J&J might think about breaking itself up into discrete component parts -- especially if it perceives that slower-growth business lines are holding back share-price gains.
A pick that will help you keep in touch
When you consider the pros and cons of these two stocks, Verizon looks like the better buy right now. With a strong dividend yield, favorable valuation, and interesting prospects for growth in multiple directions, the telecom giant seems to have more flexibility than its healthcare counterpart.
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