Today's Buy Opportunity: Johnson & Johnson

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There are blue chips, and then there are Blue Chips. And then there's Johnson & Johnson (NYSE: JNJ  ) .

In a sense, the investment case for Johnson & Johnson is very simple: Here's a company that's been around forever (technically, since 1886), that pays a 3.5% dividend, and that's spread across arguably the most necessary sector (behind water and sewage): health care.

But during the past year, trouble entered paradise. First, nasties like metal shavings, bacteria, and just plain dirt were found in children's Tylenol and about 40 other drugs manufactured by J&J's apparently not-well-supervised subsidiary, McNeil Pharmaceuticals. Then there was a contact lens recall. And most recently, J&J's DePuy unit announced that it was voluntarily recalling people's hips -- not exactly the type of thing you want to have re-replaced. (Officially, the recall is only advised if your artificial joint is causing trouble.)

But Fool, J&J is a big, big ship. These bad headlines are just that: bad headlines. Unlike, say, with Merck's (NYSE: MRK  ) Vioxx scandal, nobody was really injured by the contaminants in the medicine, and even a worst-case hip recall situation (the company estimates that about 12% of the artificial hips will need to be replaced) would barely ding J&J's massive $63 billion revenue stream.

In fact, negative headlines could mean a good buying opportunity for this company that has paid dividends since 1944. J&J's diversified revenue comes from three main groups: pharmaceuticals, which competes with big dogs like Pfizer (NYSE: PFE  ) , GlaxoSmithKline (NYSE: GSK  ) , and Abbott Labs (NYSE: ABT  ) ; medical devices like those made by Medtronic (NYSE: MDT  ) and Stryker (NYSE: SYK  ) ; and consumer products, like Tylenol and Band-Aids. In other words, you practically get a health-care mutual fund without the fund management fees.

Speaking of management, J&J is known for its solid corporate governance -- inadequate oversight of its recall-prone subsidiaries notwithstanding -- and I dig that CEO Bill Weldon has been with the company for nearly 40 years.

Truth be told, I'm a little skeptical about Big Pharma for its dependence on chemical-based drug discovery, which has showed declining productivity in recent years. But I like that J&J's pharma division has one of the strongest pipelines in the industry, meaning it should sail through near-term patent expirations on former blockbusters better than many of its peers.

One thing I'm a believer in is valuation for stalwart companies like J&J, and according to my model, J&J is priced for 25% upside. Combined with its growing dividend -- raised 7.5% in the last 12 months alone -- it's an attractive package. But at the end of the day, the story is more obvious: More people in our society are living longer, which means more medicine. In turn, that means more business for Johnson & Johnson -- and more money for shareholders like you and me.

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James Early owns shares of Johnson & Johnson. Pfizer and Stryker are Motley Fool Inside Value picks. GlaxoSmithKline is a Motley Fool Global Gains recommendation. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of GlaxoSmithKline and Medtronic. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (60)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2010, at 2:00 PM, plange01 wrote:

    j+j and p+g are both troubled stocks not worth looking at at this time......

  • Report this Comment On September 17, 2010, at 2:24 PM, Gregeph wrote:

    I agree with the article that JNJ is attractive at these levels. I have two extensive posts on my blog where I value the stock. The first - http://gregspeicher.com/?p=926 - attempts to look at what JNJ's Value Line sheet might look like in ten years. This is an exercise Buffett does when looking at a stock.

    The second valuation is a simple discounted cash flow using conservative assumptions. Here, I follow the methods used by Staley Cates, Mason Hawkins' partner at Longleaf Funds - http://gregspeicher.com/?p=951.

  • Report this Comment On September 17, 2010, at 3:08 PM, DBrown7 wrote:

    It would seem that the first comment on this thread is that of a trader, not a long term investor. If you are the latter, rather than the former, I believe both JNJ and PG provide a very good opportunity for purchase at today's prices.

    When Warren Buffett in late 2008 invested the money he had held for years in treasuries in US stocks, his second and third largest purchases were JNJ and PG. Only Wells Fargo was larger.

  • Report this Comment On September 17, 2010, at 4:44 PM, PeyDaFool wrote:

    I agree with DBrown7,

    plange01 is obviously a trader. With a score or -121.46 and an accuracy of 39.71%, I wouldn't hold this CAPS player's opinion in high esteem.

    In my opinion, JNJ is a steal at these prices and the recent recalls and other unfortunate events has presented a unique buying opportunity for us. I increased my holdings in JNJ last week and if the price remains low in the near future, I'll add more.

    With a great dividend percentage and a low dividend payout, as well as the many other positive financial metrics, I'm long JNJ.

  • Report this Comment On September 17, 2010, at 4:48 PM, Borbality wrote:

    so many good stocks, so little money to buy them with! it can be overwhelming.

  • Report this Comment On September 17, 2010, at 5:42 PM, cdubonmf wrote:

    Question: how exactly is it a steal at these prices when it has been hovering around 60 for the past ten years? Granted its a safe long term dividend stock but its not much cheaper than its been in the last 10 years.

  • Report this Comment On September 17, 2010, at 7:11 PM, PeyDaFool wrote:

    cdubonmf,

    JNJ just announced their 47 consecutive dividend increase. The price of the stock, granted, has only gone up 30% in the past ten years, that's true, but the valuation is much more attractive than it was years ago.

    Morgan Housel ran an article recently stating, "Johnson & Johnson, in 2005, earned $2.74 per share. Over the past year, it nearly doubled that, to $4.84 per share. The company also almost doubled its dividend payout during this period. Its shares? They trade lower today than they did for most of 2005."

    http://www.fool.com/investing/general/2010/09/17/5-companies...

    The reason I say it's a steal is because it's only up marginally in price while the valuation is more desirable. Imagine buying a Coke for $0.05 sixty years ago and still being able to purchase that Coke for the same price today. $0.05 is worth a whole lot less than it was in 1950, but if it still has the same purchasing power, it's a steal. The same analogy can be used for JNJ.

  • Report this Comment On September 17, 2010, at 7:48 PM, xferjenx wrote:

    "...and even a worst-case hip recall situation (the company estimates that about 12% of the artificial hips will need to be replaced) would barely ding J&J's massive $63 billion revenue stream."

    You kinda left out the lawsuits...but I still agree JNJ is a bargain. But, I'm not sure it's going anywhere anytime soon in a sideways market. I bought at $58 and sold at $60, and will likely repeat this trade for a while until the market as a whole changes its mind.

  • Report this Comment On September 17, 2010, at 8:34 PM, KZMike wrote:

    So why does the MF do this to us/me? The article above indicates we should buy JNJ. Five minutes ago I just read a MF article indicating that the price of JNJ is likely to go nowhere. JNJ is one of the five mentioned in the MF article title below>>>>>???

    5 Companies That Doubled Earnings While Their Stocks Went Nowhere.

    Maybe a coin flip is the decision maker. . .

  • Report this Comment On September 17, 2010, at 9:34 PM, scanlin wrote:

    I like JNJ, too. To increase yield I sell out of the money covered calls against my position. With the stock at 61.50 you can sell the Oct 62.50 for 50 cents. No earnings risk before Oct expiration, and if called you make an annualized return > 30%. If not called, will probably wait til after earnings on Oct 19 and then do another for Nov. Can add about 6-8%/year to JNJ's yield by writing calls each month.

    MikeS

    http://www.borntosell.com

  • Report this Comment On September 18, 2010, at 4:57 AM, nivekluap wrote:

    Why is shoestrade allowed to put this ad in the comment section? If I want to be annoyed and distracted from the main theme....I'll go wacth TV. ;-)

    By the way, I've got a hot deal on some ocean-front property here in NE.

    KD

  • Report this Comment On September 18, 2010, at 8:48 AM, AlphaCenturion wrote:

    In response to Scanlin's comment,

    Covered calls are great for hedging although I personally wouldn't use them to supplement earnings. The reason for that is you can get screwed out of major capital gains when the market suddenly decides it wants to rally. Even a low-beta stock like JNJ can see a good 10-15% move within 30 days. Trying to make money directionally with covered calls is no different from trying to time the market, and more often than not you will get it dead wrong.

  • Report this Comment On September 18, 2010, at 10:01 AM, TMFHousel wrote:

    KZMike,

    Thanks for your comments. I'm the author of the "5 Companies that doubled earnings ...." article you referred to, and nowhere did I write that J&J's stock "is likely to go nowhere" in the future. Quite the opposite, in fact. James and I seem to be in full agreement.

    Thanks,

    Morgan

  • Report this Comment On September 19, 2010, at 12:47 PM, MattSEMO08 wrote:

    I like JNJ to i have over 9% in my portfolio. I am trying find another safe long term stock to diversify my portforlio. Would anyone recommed KFT,KO,MCD,or SYY,

  • Report this Comment On September 25, 2010, at 2:06 AM, refugee07 wrote:

    TMFHousel and KZMike: communication like yours is exactly why I stick with Motley Fool. Reasonable question and an author that takes the time to respond. Great stuff. Thanks.

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