DRIP PORTFOLIO

<THE DRIP PORTFOLIO>
J&J Jackpot
1998 ended strong

By Jeff Fischer (TMFJeff@aol.com)

Paris, France (Jan. 26, 1999) -- Bingo!

Johnson & Johnson (NYSE: JNJ) reported that fourth quarter sales rose 13.1% from last year, fulfilling our belief that sales growth would begin to increase again following several quarters of low, single-digit growth (i.e., 4%, 2%, 5%). This trend should continue in 1999, though not with numbers as high as 13%. We'd be happy to see 7% to 9% sales growth for the year, acknowledging that international currencies are the wildcard that could provide either upside or downside surprises.

For 1998 as a whole, our giant healthcare concern was able to lumber ahead in the sales department enough to achieve 4.5% revenue growth. We know the drill by now: A worldwide crisis in currencies reduced much of any international growth accomplished. Meanwhile, J&J stubbed its own toe by losing big-time market share in stents and by allowing its professional product division to falter. That should begin to change now, as we're seeing. Sales comparisons are easing, new stent products are releasing, DePuy has been acquired, and management has ordered a reorganization in order to cut costs and increase efficiency in one fell swoop.

Today J&J announced fourth quarter sales of $6.4 billion. Domestic sales rose 14.2% while international sales gained 11.8%. Before charges related to restructuring, the company earned $0.50 per share, up 11% from last year's $0.45 per share. Consolidated net earnings for the quarter reached $693 million. For the year, they totaled a hefty $3.7 billion, up 11%. (What would you do with $3.7 billion?) The company's net profit margin struck a new record, at 15.5%, rising from 14.6% last year.

Very nice.

Pharmaceuticals continue to be the strongest division, driving both growth and margins, with worldwide '98 sales up 11.3% to $8.6 billion. This was largely thanks to 21.4% domestic sales growth. As we discussed in December, the company's strongest drugs are Procrit (which competes with Amgen), Risperdal and Duragesic, among others (including consumer products -- not really drugs -- such as Tylenol). Incidentally, Risperdal is an antipsychotic drug and I recently found an empty bottle of them in Brian's desk.

Worldwide sales of professional products grew 1.6% to end at $8.6 billion (matching pharmaceutical revenues). The company took a kick in the head in this division domestically, with sales down 2.4%. However, international sales grew a healthy 10.7% before currency translations knocked them somewhat asunder. Strong gains in the Ethicon division and the acquisition of DePuy were offset by a sharp decline in stent revenue at the Cordis division. However, Cordis had two new stent products approved at the end of 1998 (and a new NINJA balloon for angioplasty, too), while DePuy should benefit J&J most in 2000 and beyond.

President and CEO Ralph Larsen said, "This [DePuy] acquisition has transformed us into a leading player in the $9 billion orthopaedic market. The excellent product synergies of both organizations [DePuy and J&J's existing branch] have created a solid platform for ongoing growth."

Next up, J&J's third division: Consumer product sales reached $6.5 billion, a whopping 0.4% increase from last year (actually that increase does equate to millions of dollars!). Domestic sales gained 2.6%, while international sales lost ground due to currencies that had a negative impact on growth of 6.9%. Neutrogena and Motrin continue to grow well. This year J&J will acquire the skincare division of Johnson & Son, Inc. They make Aveeno. It's good stuff.

Our company's CEO said of 1998: "I am particularly pleased to end the year with our strongest sales performance of 1998. I'm also pleased with our ability to continue to deliver double-digit earnings growth and improved operating margins, despite a year of severe economic turmoil and protracted negative currency impact. We managed through these challenges and took several important strategic initiatives in 1998 to better position Johnson & Johnson for future growth in sales, earnings and shareowner value.''

Indeed. For the year, sales totaled $23.7 billion, up from $22.6 billion. In 1999, most estimates call for sales of nearly $26 billion, while margins should continue to improve across the board. We should see net margins topping this year's record 15.5% results (if the restructuring goes as planned), while the company's gross margin -- having moved up slightly to 68.6% this year -- could gain, too. Operating margins should certainly improve once restructuring is successfully completed.

Finally, J&J invested $2.3 billion in research and development last year, again putting it near the top of the pack in this measure. This won't abate. The company also increased its dividend for the thousandth straight year, this time by 13.6%. If J&J can increase its dividend 11% annually for nineteen more years, our initial shares will effectively be earning an $8 dividend, for an annual yield of above 12% (from the dividend alone). Can it happen? It has in the past, and sometimes with even better results than those just hypothesized. The dividend has grown every year for the past 36. Johnson & Johnson is a picture of consistency and stability. And growth.

The company's stock -- at around $82 -- is trading at 30 times trailing earnings (meaning, earnings from the past four quarters) and 27 times the 1999 estimate of $2.97 per share, while yielding 1.2%. The dividend will likely be increased again early this year. To review the complete fourth quarter press release, please click here when ready. (It typically takes a few minutes to load.)

If we had more than $100 per month to invest, I'd be very happy to send a regular sum to J&J every single month. That's Drip investing defined. As it is, however, the Drip Port can't invest in all of its companies every month due to limited (and realistic) funds. If you can invest more, of course you should do so in companies that you believe in, and in amounts that you can afford. As for us, this past weekend we sent this month's $100 to Mellon Bank (NYSE: MEL).

The J&J news was released today so it took precedence over our oil and gas study, but we'll jump back on that horse tomorrow. We're going to consider the marketing aspect of the oil and gas industry. That will carry us the final step before we dive into the deep well of information that we'll swim through (and learn from) as we study our companies one by one. If you missed it, on Friday Brian listed the companies in our study. To discuss oil and gas, J&J, or how many licks it takes to get to the center of a Tootsie roll pop, please visit the Drip message boards linked in the top right of this page.

We'll leave the Web server on for ya. Fool on!

--Jeff Fischer

Change the World... work for the Fool.

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1/26/99 Close

Stock    Close     Change
JNJ    82 9/16  +3 13/16
INTC 136 15/16   +6 5/16
CPB     44 1/8   -1 7/16
MEL     67 1/8    +1 1/8
            Day     Month    Year    History
Drip      3.18%     3.11%    3.11%    17.27% 
S&P 500   1.49%     1.88%    1.88%    33.48% 
Nasdaq    2.71%    10.98%   10.98%    52.68% 


Last Rec'd    Total #    Security    In At    Current
 11/02/98      8.055       CPB      $52.880   $44.125
 12/01/98      9.731       INTC     $80.248  $136.938
 12/08/98      8.605       JNJ      $74.109   $82.563
 01/04/99      3.994       MEL      $62.227   $67.125


Last Rec'd  Total #  Security  In At     Value    Change
 11/02/98    8.055     CPB    $425.95   $355.43  ($70.52)
 12/01/98    9.731     INTC   $780.89  $1332.53  $551.64 
 12/08/98    8.605     JNJ    $637.71   $710.45   $72.75 
 01/04/99    3.994     MEL    $248.56   $268.12   $19.56 


Base:  $2300.00
Cash:   $162.89**
Total: $2829.42

The Drip Portfolio has been divided into 96.509 shares with an average purchase price of $23.832 per share.

The portfolio began with $500 on July 28, 1997, adds $100 on the 1st of every month, and the goal is to have $150,000 in stock by August of the year 2017.

**Transactions in progress:
10/24/98: Sent $40 to buy more INTC.
01/18/99: Sending $100 to buy more MEL.


</THE DRIP PORTFOLIO>