Better Buy: Abbott Laboratories vs. Pfizer

Investors looking for large-cap, dividend-paying healthcare stocks have plenty of options. Whether it's large-scale drug manufacturers or medical technology providers, there's enough choice to suit whatever you're looking for.

Abbott Laboratories (NYSE: ABT) and Pfizer (NYSE: PFE) both have large market valuations, solid dividends, and a strong track record of success. However, they operate in different areas of the healthcare market, with Abbott developing diagnostic equipment while Pfizer focuses on developing new pharmaceutical candidates.

If you had to choose between the two, however, which is the better investment?

Abstract image of a scientist holding a clipboard with a series of medical symbols in front of him.

Image source: Getty Images.

Big changes for Pfizer on the horizon

The upcoming year is going to bring quite a few changes for Pfizer, and that has many investors on edge. The company's new CEO, Albert Bourla, is implementing a major shift in corporate strategy, focusing on higher-margin products by spinning off well-known drug brands that have been dragging down revenue growth.

Earlier in July, Pfizer announced that it was selling its non-patent drug unit, Upjohn, to Mylan, creating a new company called Viatris in the process. Viatris will be home to a number of well-known drug brands that have been decent revenue drivers, although their growth rates have slowed down. 

If shedding its Upjohn drug collection wasn't a big enough change, Pfizer also announced that it will combine its consumer healthcare unit with GlaxoSmithKline's own equivalent business to create a separate entity for over-the-counter products. While Pfizer's consumer healthcare division wasn't that large, and it still will retain a 32% stake in the new joint venture, it will mean the loss of some well-known products, most notably Advil.

Pfizer will be going back to basics, so to speak, focusing on developing new drug candidates as well as marketing its existing lineup of rapidly growing blockbuster candidates. This includes a cancer drug called Inlyta, a rare heart disease treatment called Vyndaqel, and immunology drug Xeljanz. All three drugs have seen very strong growth rates, with Inlyta up 240%, Vyndaqel up 325%, and Xeljanz up 40% year over year in terms of sales. 

The company's best drug candidates, an anticoagulant called Eliquis and a breast cancer drug called lbrance, are also still staying with Pfizer. Both drugs are the primary revenue sources for their respective areas -- internal medicine and oncology -- and collectively account for 18% of Pfizer's total revenue.

Overall, Pfizer's facing a big shift, but it's likely to emerge from it as a more focused and efficient drug developer than it's been in many years.

Abbott's consistent growth from a diverse business

In contrast to Pfizer, Abbott has stayed relatively the same for the past few years. Ever since splitting from AbbVie in 2013, the company has done quite well for itself. Doubling in stock price, delivering consecutive double-digit growth rates, and all the while maintaining a consistently increasing dividend is quite an impressive achievement, considering its large size.

Unlike Pfizer, Abbott isn't a new drug developer. Instead, its main revenue source comes from the sale of medical diagnostics equipment and devices, primarily in the realm of cardiovascular disease but also other conditions, such as diabetes. Thanks to some major acquisitions, including a $25 billion buyout of rival medical device maker St. Jude Medical in 2016, Abbott's medical device sales have seen high single-digit growth in what's already the company's largest business segment.

While medical device sales are Abbott's bread and butter, its total revenue is split among four main business areas. One of these is Abbott's nutritionals business, which primarily provides formulas for infants and small children. The company also has its own generic-drug business, which sells branded generic versions of drugs whose patents have expired. These two businesses accounted for 24% and 14% of Abbott's 2018 revenue. In comparison, Abbot's medical device segment accounts for 37% of the company's revenue, while its second largest-business, diagnostics, accounted for 25% of 2018 income.

Comparing financials

Both Pfizer and Abbott are large-cap stocks, with market caps around $216 billion and $154 billion, respectively. As it turns out, both companies have relatively similar financial metrics.

Looking at their price-to-sales (P/S) ratios shows that Pfizer trades at 4.25, while Abbott comes in at 4.93. That's pretty much in line with most other large-cap healthcare stocks, with Johnson & Johnson trading at 4.8 times sales, while Amgen trades at a 6.39 P/S ratio.

While Abbott ended up taking on a significant amount of debt to fund its acquisitions, the company has done a good job paying off its debt since then. Long-term liabilities have fallen from $27 billion in Q4 2017 to $17.6 billion in Q3 2019, a 35% decline in just two years. In comparison, Pfizer's debt has grown a little over that same period, from $31.8 billion to its current $36.0 billion.

What's the verdict?

Pfizer and Abbott have quite a few differences, despite their similarities. Pfizer is undergoing some major changes, spinning off many of its older, stagnating drug brands to focus on developing and marketing its portfolio of high-growth drug candidates. So far, the drug lineup that Pfizer's holding on to right now has seen very impressive growth rates, some even in the triple digits.

On the other hand, Abbott embodies the philosophy of "slow and steady wins the race." The company has maintained a more than reasonable growth rate over a long period and is likely to continue doing what it's already doing.

There's a strong case to be made for both companies, but if I had to choose, I'd lean a bit more toward Pfizer. While Abbott might be a better investment for a hands-off investor looking for a safe and secure stock, Pfizer's move to focus on its high-growth drug segment gives the stock major upside potential in the next year or two. Both companies, however, are good investments and should have a lot going for them in the future.

10 stocks we like better than Pfizer
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Pfizer wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of December 1, 2019


Mark Prvulovic has no position in any of the stocks mentioned. The Motley Fool recommends Amgen, Johnson & Johnson, and Mylan. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.