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Many healthcare investors look at Johnson & Johnson (NYSE: JNJ) and see a good, safe dividend stock. But I see an investment that's full of uncertainty and risk.
The company continually runs into legal problems, and I can't help but wonder if one day it will follow in the path of 3M, which was also once seen as a top investment option for risk-averse investors who just wanted to collect a safe dividend; it, too, has run into many legal problems, and 3M is now looking to reset its payout after decades of dividend growth.
I would argue Johnson & Johnson isn't worth the risk. And given the uncertainty it faces and its low growth rate, it's too expensive, even at what might seem to be a modest 22 times earnings. Instead of investing in Johnson & Johnson, I suggest you consider a better and safer investment in AstraZeneca (NASDAQ: AZN).
AstraZeneca's growth prospects look more promising
Biopharmaceutical company AstraZeneca has a broad and diverse business, not unlike Johnson & Johnson's. But there's a lot to like about the company with its strong oncology business and CEO Pascal Soriot having said that it's on track to deliver 15 new products before the end of the decade. And for the most part, AstraZeneca has been generating better growth numbers than Johnson & Johnson.
JNJ revenue (quarterly YoY growth) data by YCharts; YoY = year over year.
In its most recent quarterly results, for the period ending March 31, the company reported $12.7 billion in revenue, up 19% year over year. And its oncology business increased sales by 26% to $5.1 billion. Multiple segments generated double-digit growth this past quarter.
Meanwhile, Johnson & Johnson is targeting growth between 5% and 7% to the end of the decade.
Johnson & Johnson should trade at more of a discount
In terms of valuation, AstraZeneca is a slightly more expensive stock than Johnson & Johnson right now. But investors often expect to pay a premium for a better growth stock. And I would argue that up until recently, their valuations were fairly close, in terms of their forward price-to-earnings multiples, which are based on analyst estimates of how they will perform over the next 12 months.
JNJ PE ratio (forward) data by YCharts; PE = price to earnings.
Throw in the fact that Johnson & Johnson still has the cloud of its unresolved talc lawsuits hanging over it, and there's even more reason investors should be demanding a discount for the troubled healthcare stock. The company is trying to resolve its talc lawsuits through a bankruptcy filing involving a subsidiary (this is its third attempt), but it's no guarantee that will definitively put the matter to rest.