Is This Stock A Buy After Giant Acquisition?
Nur 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) announced on Monday, June 17, that it is buying Aragon Pharmaceuticals, a privately-held drug company. Shares of Johnson & Johnson moved slightly higher right after the announcement was made. The transaction is estimated to cost Johnson & Johnson approximately $1 billion. About $650 million will be in the form of upfront cash payment. The remaining $350 million will be paid after Aragon Pharma meets certain milestones.
Aragon Pharma Buyout Detail
While the transaction looks optimistic for Johnson & Johnson, some details of the acquisition left investors confused. Despite the billion dollar deal, Johnson & Johnson will not be able to have a full stake in Aragon’s assets. Aside from its prime program, ARN-509 for the treatment of prostate cancer, Aragon will transfer its assets to another firm. A new company, Seragon Pharma, will be formed where Aragon will spinoff most of its assets.
This, therefore, means that the $1 billion transaction will be mainly for the ARN-509 drug and the company name Aragon. All intellectual property rights of ARN-509 will be transferred to Johnson & Johnson. ARN-509 is a second generation anti-androgen drug that is still under the Phase II open-label clinical trial. It is designed for the treatment of castration-resistant prostate cancer, particularly in cases where the 1st generation anti-androgens failed.
In the U.S., about 29,000 men die annually from prostate cancer, which affects about 1 in every 6 male Americans. About 30% of the cases using radiation and surgery treatment ended in failure to save the patient. This paved the way for ARN-509 to come in, offering a solution to treat cancer in castration-resistant cases. If ARN-509 eventually makes it towards FDA approval and market launch, this will give Johnson & Johnson an added boost.
The acquisition is expected to further strengthen the market leadership of Johnson & Johnson in the prostate cancer segment. Together with Zytiga, the company’s novel approach to help patients suffering from prostate cancer will be further enhanced. It is projected that the transaction will be complete by the end of the 3rd quarter in 2013. This should fuel, in part, the company’s expected growth for this year.
Company Financials and Dividend Profile
Being a mega cap firm, Johnson & Johnson is a stable company. Its market capitalization of $240 billion is way above the industry average at only $64 billion. It has a P/E ratio of 23.27, which also surpassed the P/E ratio of the industry at 14.20.
In its latest financial report, the company posted net income of $10 billion from total revenue of $68 billion. Its profit margin is 15.22%, with return on equity almost at par at 15.76%. The firm has total cash of $21.67 billion, while its total debt is $15.89 billion. At present, it is trading at 3.56 times its book value.
Johnson & Johnson is a good dividend investing stock with a nice current yield of 3.11%.The annualized dividend per share is $2.64. Based on its dividend profile, Johnson & Johnson is already an attractive stock for dividend investing.
The projected yearly gain from dividends is much higher compared to the 10-year U.S. Treasury rate. This is on top of the more than 22% year to date gain in the stock market. With the recent acquisition of Aragon, the company is projected to maintain or improve its impressive shares-growth this year.
But in spite of that, it is still best to take a look at its closest peers. By knowing the best opportunities to secure a position, you will be able to arrive at a smarter choice.
Johnson & Johnson versus its Peers
Being a well-diversified company, it has several competitors in different industries. One of its closest peers in consumer retail is Proctor & Gamble (NYSE: PG). But in the pharmaceutical industry, among its biggest competitors are Pfizer (NYSE: PFE) and Novartis (NYSE: NVS).
Currently yields better at 3.3%.
Pfizer is a mega cap company with strong market capitalization of $206.8 billion, which is also above the industry average. However, its P/E ratio is slightly lower than the industry at 13.95. But just like Johnson & Johnson, it is earning with net income of $10.2 billion from $57.6 billion revenue. The profit margin is higher at 26.95%.
When it comes to dividend investing, Pfizer is more attractive with higher dividend yield. However, share performance is lower than Johnson & Johnson at 14.48% year-to-date. On June 12, Pfizer together with Takeda Pharmaceuticals was awarded $2.15 billion settlement from Sun and Teva. The settlement was for infringement of Protonix patent. This lifted the declining shares of Pfizer, which is now moving in upward trend.
Even more attractive yield at 3.48%.
Compared to Pfizer and Johnson & Johnson, Novartis yields better with an annualized dividend of $2.53 per share. It is stable, as well, being a mega cap company with solid market capitalization of $180 billion. For this year, Novartis shares grew 19.2% in the trading floor. This makes it more attractive on top of the nice dividend yield.
Novartis is a well-diversified firm that expands to eye care through Alcon and generics distribution via Sandoz. It also has over-the-counter products, vaccines and diagnostics, as well as animal health division.
Proctor & Gamble
Good yield at 3.08%.
Proctor & Gamble is another good mega cap dividend stock with relatively attractive yield. The annualized dividend is $2.4 per share. Proctor & Gamble has a strong market capitalization of $216.41 billion, with profit margin of 15.61%. Its shares also jumped 15.5% for this year, making it more attractive to dividend investors.
In May 2013, its former CEO, A.G. Lafley was reinstated back at the helm of the company’s executive leadership. He replaced Bob McDonald. With Lafley now running the show, there is better hope for a major turnaround from its lackluster performance. This gives investors more reasons to invest in Proctor & Gamble aside from its already-attractive dividend yield.
In a nutshell, the above stock choices are equally attractive for dividend investing. Each has interesting news to remain upbeat. Johnson & Johnson is one of the best stocks to secure a position for dividend investing. Aside from high dividend yield, the potential growth in shares is also optimistic, especially with Aragon under its wings.
Nur Tarkak has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Procter & Gamble. 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!