Johnson and Johnson's Earnings Should Confirm What a Great Company it Is

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Johnson and Johnson (NYSE: JNJ) is one of the largest and most diverse health care companies in the world, with a market cap of just over $200 billion.  The company is generally looked at as a rock-solid investment that pays a nice dividend of around 3.4%.  With the company set to report earnings on Jan. 22, investors will want to hear several things, especially in regards to recent acquisition Synthes. 

First, a little bit about the inner workings of the company.  Johnson and Johnson operates in three segments.  First, the pharmaceuticals segment (37% of sales) includes all of the company’s prescription drugs, with market leaders Remicade ($5.5 billion annually), Procrit ($1.6 billion), Concerta ($1.3 billion) and many others.  The medical devices and diagnostics segment (40% of sales) sells a variety of products including sports medicine and healthcare products, as well as Cordis’s circulatory disease management products, Lifescan blood glucose monitoring equipment, and more.  Finally, the consumer segment sells a variety of personal products, many of which are household names such as Band-Aids, Immodium, Johnson’s baby care products, and Tylenol. 

Now, back to acquisitions. Johnson and Johnson has made many strategic acquisitions over the past decade or so.  Notable acquisitions include the consumer products division of Pfizer (NYSE: PFE) in 2006, Acclarent in 2010, and most recently, Synthes in 2012.  Acquired last June for $19.7 billion, Synthes is a leading maker of skeletal fixation implants and other orthopedic products.  The general consensus among analysts seems to be that the acquisition should significantly enhance J&J’s global reach in the orthopedics market.  Consensus estimates call for 2013 revenues to rise about 8%, and the main reason cited is the Synthes acquisition, which is expected to contribute $4.3 billion in sales in 2013.  During the earnings call, pay particular attention to the company’s comments on Synthes’ sales, and how much the acquisition benefited the company in the latter half of 2012. 

In terms of consistency in raising the dividend, Johnson and Johnson is one of the best there is (see chart below).  Over the past decade the company has consistently raised its dividend every year, from 80 cents per share in 2002 to $2.44 pre share now.  Note the almost perfectly linear increase over time.  Predictability is a rare commodity in investing these days, so this alone separates J&J from the rest of the pack. I would be very surprised if we didn’t see a raise for 2013, and my best guess would be a 20-21 cent raise, putting the dividend around $2.65 per share.  In addition to the dividend, J&J also has a great buyback program, and since 2008 has reduced the number of outstanding shares from 2.84 billion to 2.77 billion, a 2.5% reduction.

 

 

With respect to valuation, J&J trades at 14.2 times 2012’s consensus earnings, which are expected to rise to $5.49 and $5.89 in 2013 and 2014, respectively.  This means that earnings growth of 15.7% is expected over a two year period, and the P/E ratio sounds fair based on that.  However, the company’s ace in the hole is its stockpile of cash, $32.3 billion as of last year, and only $13 billion in long-term debt, for a net cash position of $19.3 billion.  Backing this out of the market cap, J&J’s business itself is valued at only $65.42 per share, or 12.8 times earnings, which looks much more attractive for the earnings growth expected. 

With all of that being said, when investing in Johnson and Johnson for the long term, you really can’t lose.  With one of the best dividend records in the market and a great buyback program, this company is great at creating value for its shareholders.  If the results of the Synthes acquisition are as positive as expected, it just gives investors yet another reason to love this stock.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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