Which Big Pharma Stock Is For The Risk Averse?

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JNJ: Johnson & Johnson logo
JNJ
Johnson & Johnson

Trefis currently covers Johnson & Johnson (NYSE:JNJ), Bristol-Myers Squibb (NYSE:BMY), Pfizer (NYSE:PFE), Roche (NASDAQ:RHHBY) and Merck (NYSE:MRK) in pharmaceutical universe. The common trend among these companies has been the patent cliff weighing on the revenue growth. However, their balance sheets still remain strong enough to finance future R&D and acquisition activities. In this analysis, we quickly look at certain metrics to ascertain their relative financial strength and risk, and try to identify a less risky investment. Considering the level of debt management, market exposure and valuation metrics, J&J appears to be a relatively safe dividend stock.

Johnson & Johnson and Bristol-Myers Squibb Are Managing Debt Well

The data below gives us a sense of how are the big pharma companies doing in terms of managing their debt. The debt to equity ratio is a relevant measure, and appears to be low for Johnson & Johnson and Bristol-Myers Squibb as compared to the others. Though, it must be noted that the value for the others isn’t too high either. However, the aforementioned two companies have done well in terms of keeping their debt and interest expenses low in the context of their market value, which is something that investors value. However, despite having high debt, Pfizer has the best net cash position. While Pfizer has been financially disciplined, it has raised additional debt in the past to fund its insatiable appetite for acquisitions. Please note that while calculating debt to equity ratio, we have used market value of equity and have included pension and other post-retirement benefit obligations in debt to give a truer picture.

Merck Roche Pfizer JNJ BMY
Debt to Equity Ratio 14.0% 13.7% 22.2% 10.4% 8.0%
Interest Expense to Debt Ratio 3.42% 3.60% 3.71% 2.84% 2.59%
Net Cash to Equity Ratio 4.7% -5.5% 8.0% 5.2% 3.6%
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Combining The Above With Observed Risk Measures, We Find J&J A Relatively Safe Dividend Stock

Beta is a measure of stock volatility and its correlation with the market. The big pharma companies have relatively low values for beta, ranging from 0.18 for Bristol-Myers Squibb to 0.74 for Pfizer, with Johnson & Johnson sitting comfortably in the middle at around 0.50.

However, Bristol-Myers Squibb (BMY) has relatively high value of P/E ratio (~ 50). For the others, the value ranges between 15 and 25 which we find quite reasonable. This suggests that BMY’s stock may be a tad bit expensive and the company will need to justify it with strong earnings growth. That may not be easy.

Considering the balance sheet figures and the risk/valuation measures discussed above, we feel that Johnson & Johnson is a relatively safer stock for investors looking for steady dividend income and risk diversification. Johnson & Johnson has been an industry stalwart in terms of returning capital back to shareholders in form of dividends. Additionally, the company has consistently increase the dividends every year, and most recently by 7%.

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