Johnson & Johnson (JNJ -0.46%) is one of the leading and most recognizable names in healthcare. It generates billions in revenue and profit every year and its products are used all over the world. It's a truly global organization that has achieved considerable success over the years.
It also pays a dividend that it has increased for decades, giving investors plenty of incentive to buy and hold the stock, simply collecting that recurring payout along the way.
In the past 10 years, the stock's total returns (which include dividends) have come in around 125%, creating significant value for shareholders. It has been a great investment, particularly for risk-averse investors who wanted a stock they could just buy and forget about.
Here's why it isn't a great buy anymore.
Talc lawsuits pose a serious threat to the business
For decades, Johnson & Johnson has arguably been a beloved name in healthcare. Many consumers associate the brand with quality and safety. However, that may not necessarily be the case anymore. Of late, the healthcare company has been battling countless lawsuits, particularly with its talc-based products, which plaintiffs allege were contaminated with materials that led them to develop cancer.
These are serious claims and J&J is fighting against them vigorously. This isn't just about protecting its image, however; it's also about the significant amount of money that is at stake. Johnson & Johnson has gone to considerable lengths to try and put the issue to rest. It tried to use a subsidiary, LTL Management, to assume responsibility for all the lawsuits and then bankrupt it, thus limiting its overall liability. Judges rejected this attempt -- twice.
If the plan had been approved, Johnson & Johnson would have put $8.9 billion into LTL to fund a settlement. If it's willing to settle on that amount, you can be sure that it's worried its total liability is likely to otherwise be far higher than that. With tens of thousands of lawsuits outstanding just related to talc, it becomes nearly impossible to estimate the total liability the business faces. One way the company has been able to effectively offload some liability is through the spinoff of its consumer health business into Kenvue (KVUE -0.84%), which will be responsible for any talc lawsuits that arise outside of the U.S. and Canada.
Given the uncertainty regarding the talc lawsuits, investors should tread very carefully with Johnson & Johnson's stock. It's tempting to assume that since it makes billions, it can absorb these legal costs, but these legal bills keep on mounting. It has also faced litigation related to other products, including Risperdal, opioids, and vaginal mesh implants.
The company's financials may not be as strong in the future
Last year, Johnson & Johnson reported $13.3 billion in profit, with revenue totaling $85.2 billion. But what the future holds is a question mark because the company is facing the loss of exclusivity for top-selling psoriasis medication Stelara, which could face competition in the U.S. as early as next year. In 2023, Stelara generated $10.9 billion in revenue.
Between 2025 and 2030, Johnson & Johnson projects that it will generate annual growth between 5% and 7%, hoping the development of new drugs to will help offset the loss of exclusivity for Stelara. But the relatively modest single-digit expansion rate may not be sufficient for the company to both be an attractive growth investment and be financially strong enough to absorb the possible legal battles ahead.
While Johnson & Johnson's recent results are still impressive, the company's future has never been cloudier than it is now. Rising legal costs could burden the business and potentially impact the safety of its dividend, especially as it focuses more on growth and creating innovative medicines.
Johnson & Johnson isn't the safe stock it used to be
In the past, Johnson & Johnson may have been a good healthcare stock to comfortably hold in your portfolio. But that's no longer the case. Until there is a resolution to the talc-related issues, the stock is simply too big of a risk these days. The legal bills pose a threat to the company's dividend and its long-term growth objectives. And with many other dividend stocks and top healthcare companies to invest in, there's just not a compelling reason to put money into J&J when there are much better and safer options out there.
