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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.
Previous 11 O'Clock Stock recommendations:
- CGG Veritas
- Cal-Maine Foods
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The Motley Fool will wait at least 24 hours after this publication before buying shares of Johnson & Johnson. To see an FAQ on the "11 O'Clock Stock," click here.