There is Value in Johnson & Johnson
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Johnson & Johnson (NYSE: JNJ) has been a notable underperformer in the last two years, the chart from Yahoo! Finance compares the stock with two relevant ETFs: S&P Depository Receipts (NYSEMKT: SPY) which tracks the S&P 500 index, and Health Care SPDR (NYSEMKT: XLV) which invests in healthcare stocks. The company has produced almost no price gains and significantly lagged its benchmarks during the comparison period.
Although the company has faced some problems in the last years and will need to adapt to changing conditions, its competitive advantages and fundamental qualities are as strong as ever. Value investors with a focus on strong companies with attractive dividend yields may want to take a look at Johnson & Johnson and take advantage of its current low valuation from a long term perspective.
Over the last quarters the company has reported unimpressive growth numbers, and product recalls have produced some negative press coverage. Patent expirations and increased competition will also exert pressure over the company in the middle term. The fact remains, however, that Johnson & Johnson has successfully gone through many challenges in its long history, and its fundamentals are strong enough to face the difficulties it may face in the following years.
The level of diversification that the company provides is really outstanding, and it protects investors against possible setbacks in particular products or business areas. Johnson & Johnson divides its business in three different segments:
Pharmaceutical - 37% of sales in 2011
Medical Devices and Diagnostics – 40% of sales in 2011
Consumer: 23% of sales in 2011.
As we can see from the following charts taken from Johnson & Johnson´s 2011 annual report, each of these business segments are also highly diversified.
Alex Gorky, the company´s new CEO will need to address many important issues, with quality control being one important and urgent priority. Although Johnson and Johnson will recover in time from the negative effects of the last recalls, the subject is sensitive and it can produce a lot of damage to the brand if it´s not controlled properly.
Johnson and Johnson is also planning to reinvigorate growth via acquisitions and new products development. Having one of the biggest commercial and distribution networks in the world, the company has the possibility to successfully market new products on a worldwide scale in a relatively rapid manner.
The company sports a 3.8% dividend yield, which looks quite convenient in a context in which 10 year US treasury bonds are yielding less than 2%. It´s worth noting that this is one of the few companies in the world with AAA credit rating. Johnson and Johnson has increased dividends for 49 consecutive years, even through recessions, financial crises and all kinds of economic problems.
Historical dividend yield charts from YCharts:
Regardless of its setbacks during the last years, Johnson & Johnson is a strong as ever from a long term fundamental perspective. This may be a convenient time for value investors with a taste for stable dividend stocks to consider adding this strong company at an attractive valuation.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.