Verizon Communications (NYSE: VZ) as well as Johnson and Johnson (NYSE: JNJ) both are slow-growing stocks that are often held to provide stability and income. I compared the two blue chips back in February and predicted that J&J will surpass Verizon this year as it faces fewer hurdles in the short term.
However, J&J shares have dropped about 2% since I made this call, while Verizon is up about 5%. Have I overestimated J&J’s ability to outperform Verizon and the market? Or is the multidisciplinary healthcare giant still a better long-term investment?
Verizon still faces major challenges
Verizon is often compared to AT&T (NYSE: T) for three reasons. Firstly, it is the largest wireless operator in the country in terms of the number of subscribers. AT&T dropped to third place after T-mobile (NASDAQ: TMUS) merged with Sprint last year.
Second, Verizon owns a much smaller Pay TV business than AT&T. Therefore, it can more easily compensate for the loss of Pay TV subscribers by increasing the number of wireless subscribers.
Finally, Verizon has not followed AT&T’s lead and tried to build a media empire through major acquisitions. He tried to build a business on the Internet by buying the Internet assets of Yahoo and AOL, but the doomed effort was worth far less than the acquisition of AT&T DirecTV and Time Warner, which the company is now trying to wind down with a desperate asset sale.
But Verizon isn’t necessarily a good investment just because it is ahead of AT&T. It still has about $ 150 billion in long-term debt, most of which stemmed from the buyout. Vodafonea stake in Verizon Wireless seven years ago – and its 5G network still has less geographic coverage than T-Mobile.
T-Mobile is also targeting Verizon and AT&T with its carrier-free strategy, which eliminates contracts, subsidized phones, data coverage fees, early termination fees and other annoyances. This competitive pressure could force Verizon to increase spending to maintain its lead.
Verizon recently agreed to sell most of its media assets, including Yahoo and AOL, to companies Apollo Global Control (NYSE: APO) focus on improving your core wireless business. This is a step in the right direction, but Verizon is arguably still a weaker cellular operator than T-Mobile.
J&J’s strengths compensate for his weaknesses
J&J operates three core businesses: pharmaceuticals, healthcare and medical devices. All of these segments are well diversified and their overall strengths usually compensate for their weaknesses.
For example, J&J’s pharmaceutical business was once heavily dependent on a popular rheumatoid arthritis drug called Remicade, but growth has slowed in recent years as more biosimilars were approved. Other major drugs, including the cancer drugs Zytiga and Velcade, have also faced generic competitors.
To counter these blows, J&J bought more biotech companies like Momenta, struck revenue-sharing deals with promising drug makers, and its subsidiary Janssen has developed new drugs, including its one-shot COVID-19 vaccine. His consumer goods and medical device business has also generated strong revenue growth as the pharmaceutical business expanded.
As a result, J&J’s pharmaceutical division began to grow again, led by its cancer drugs Darzalex, Imbruvica and Erleada; his autoimmune drugs Stelara and Tremfya; antipsychotic drug Invega; and his drugs for hypertension Opsumit and Uptravi. Together, these eight growing drugs together generated $ 15.4 billion in revenue – more than a third of J&J’s total pharmaceutical sales – in 2020. Remicade only generated $ 3.7 billion in revenue.
J&J’s adjusted operating sales of medical equipment fell 11% last year as patients delayed nonessential surgery during the pandemic. But the strengths of its consumer healthcare and pharmaceuticals businesses, which saw adjusted operating revenues rise 3% and 8%, respectively, offset the decline.
All three J&J divisions face many competitors. Nonetheless, J&J remains the market leader in all three categories, and its worldwide brand recognition gives it ample opportunity. The company has suffered several legal setbacks in recent years regarding security and recall issues, but its portfolio is so well diversified that it can withstand these challenges and the costs of one-time legal settlements.
Growth rates and estimates
Verizon’s operating revenue fell 3% in 2020 as the pandemic disrupted new phone sales. Pay TV and online media businesses also remained weak. However, adjusted earnings per share were up 2% on tighter cost controls.
Analysts expect Verizon’s operating income and adjusted earnings per share to grow 4% this year as more customers purchase 5G devices. The sale of his weak media assets should complement this growth.
J&J’s operating revenue grew 1% in 2020, but adjusted earnings per share fell 8% as COVID-related disruptions and costs lowered its margin. But this year, analysts expect its revenues and adjusted earnings to grow 11% and 19%, respectively, as all three of its businesses grow together again.
Based on these expectations, Verizon is trading at only 11x its forward profit, while J&J has a slightly higher forward P / E ratio of 17. Verizon’s dividend yield of 4.3% also outperforms J&J’s 2.4%. …
Winner: It’s still Johnson & Johnson.
Verizon shares are cheaper, but they face bigger challenges than J&J. In addition, over the past two decades, the company has been behind the J&J and the S&P 500 in overall return, which takes into account reinvested dividends.
Past performance is not a reliable indicator of future earnings, but I believe Verizon’s weaknesses will continue to overshadow its strengths. Verizon is a good investment, but it’s hard to recommend buying it when there are a lot of the best blue chips, including J&J, to choose from.
This article represents the opinion of an author who may disagree with the “official” recommendation position of Motley Fool’s premium consulting service. We are colorful! Bidding on an investment thesis – even our own – helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.