Best Stock for 2008: Johnson & Johnson

Ring in the new year with more stocks for 2008.

You may not realize multibagger returns from my 2008 pick, but you can expect solid growth from this solid company that's been a little anemic of late.

Johnson & Johnson (NYSE: JNJ) may not have returned to dirt-cheap-dream-stock status yet, but if you've been looking to buy into the all-American company, now seems like as good a time as any.

Diversity for all
J&J's woes for 2007 can essentially be broken down into two areas: stents and its anemia medication, Procrit/Eprex.

The drug-releasing stent market may turn around, as safety worries appear to be overblown, but both Abbott Laboratories (NYSE: ABT) and Medtronic (NYSE: MDT) are poised to bring competing stents onto the U.S. market. While I've been critical of Johnson & Johnson's advertising scheme, its stent does have a longer safety history, which will help it hold its current market share.

Meanwhile, J&J's and Amgen's (Nasdaq: AMGN) anemia drugs ran into problems this year as the Centers for Medicare and Medicaid Services enacted stricter reimbursement rules that curtail their usage in patients reliant on these government insurance programs. The good news for the anemia compounds is that sales have probably fallen about as low as they'll go.

While it's possible that J&J might not be able to turn around either of those markets, it doesn't really matter. J&J is so diversified that it can just fill the hole in the top line with another division, like its acquisition of Pfizer's (NYSE: PFE) Consumer Health Care a year ago. In addition, its recent reorganization has had a double-decker focus on both cost-cutting and growing into aspects of health care currently untouched by the company. As the charges associated with the reorganization come to a close, their effects will start to be felt in 2008.

Cash for all
Despite its anemic stock price, Johnson & Johnson still increased its dividend this year.

	Annual Dividend	Increase Over Previous Year
2007	$1.66	11%
2006	$1.50	14%
2005	$1.32	16%
2004	$1.14	17%
2003	$0.96	19%
2002	$0.82	14%

In fact, the company has a 45-year history of dividend growth. For dividend-loving Fools, that's a lot of time for a stock to be paying you back.

While income is down in recent months, J&J's free cash flow, which is used to pay those dividends, is actually up.

	2002	2003	2004	2005	2006	LTM
Net income	$6.6	$7.2	$8.2	$10.1	$11.1	$10.4
Free cash flow	$6.1	$8.3	$8.9	$9.2	$11.6	$12.4

Figures in billions. LTM = trailing 12 months ended September 2007. Data provided by Capital IQ, a division of Standard & Poor's.

Free cash flow ultimately goes two places. Besides dividends, the company uses the cash to invest in itself -- remember that two-pronged reorganization plan -- which should drive growth and the stock price. Both uses of the free cash flow will benefit shareholders.

Foolish final thoughts
I think J&J is a good investment because, unlike its big-pharma peers, it's not reliant solely on drugs that will end up off-patent. It'll never have explosive growth like development-stage drugmakers, but its stock price isn't likely to get a huge haircut. There's something to be said for having a more stable stock in your portfolio.

Investors should do their own due diligence and not just take my word for J&J's prospects, but I will point out that both Warren Buffett and Jim Schout, the man who scoffs at 24% returns, have purchased J&J stock recently. They likely bought during the dip in the first half of the year, but you should take the purchases as a sign that they think the company still has potential.

Do you agree with me that Johnson & Johnson will break out of its slump in 2008? Cast your vote at Motley Fool CAPS, and join more than 79,000 other Fools interested in making next year a profitable one.