Johnson & Johnson (NYSE: JNJ ) is currently trading lower by 2%, and has been a somewhat poor performer for the better part of the last month. After gains of 30% in 2013, some might think that it's now time to take gains off the table. However, investors must understand that Johnson & Johnson is not a trade, but perhaps a rare investment of safety and opportunity.
A company of many strengths
Johnson & Johnson is one of the most diversified pharmaceutical companies in the world. Of course, it has a large pharmaceutical business that includes the likes of Zytiga and Invokana, but also has a large consumer and medical device segment.
This diversification protects the company from macro events, such as the patent cliff in its pharmaceutical space. Evaluate Pharma estimates that approximately $133 billion in U.S. brand drug sales will be lost between the years of 2011 and 2016 due to new generic introductions. Already, we have seen countless companies like Pfizer (NYSE: PFE ) face fundamental pressure, and others like Eli Lilly (NYSE: LLY ) that are expected to lose blockbusters in the near future.
While J&J faces the same risks and must overcome these obstacles, the size of its business and its diversification provides a sense of security in the face of patent turmoil.
To explain, we can turn to a company such as Eli Lilly to see the effects that patent expirations can have on a company. Analysts expect Eli Lilly's sales to decline 14.1% in 2014. The company currently has $23 billion in trailing 12 month sales, but will face patent expirations on blockbusters Cymbalta and Humalog.
With that said, a 14.1% year-over-year loss might even be conservative, as Cymbalta and Humalog alone account for nearly 30% of the company's annual revenue. Therefore, the patent losses could be catastrophic to the company's stock, which is a fear that J&J investors don't have to experience, as no single product has such a heavy weight on J&J's top-line.
A large company with reliable growth
As many of J&J's competitors have either suffered substantial revenue losses, or are prepping for bad years, J&J continues to grow.
In the company's last quarter, it posted year-over-year revenue growth of more than 3%, which included 10.9% gains in global pharmaceuticals sales .
With $7 billion in quarterly sales, the pharmaceutical industry is J&J's largest business, accounting for nearly 40% of total revenue.
Overall, J&J is expected to grow 5.5% this year, and another 4.2% in 2014 according to the consensus. This is a company with $70.5 billion in annual sales that's growing at a rather impressive rate. Not to mention, the FDA just approved the blood cancer drug Imbruvica.
Imbruvica is co-marketed by J&J and Pharmacyclics; J&J is responsible for 60% of the costs and earns 50% of the sales. Analysts believe that sales of the drug will exceed $6 billion annually, and some estimate peak revenue of up to $9 billion. Therefore, Imbruvica is a single drug that's going to drive top-line performance for the next five years, providing more reasons to be optimistic.
This catalyst, combined with the continued growth of existing products is more than we can say about competitors Pfizer or Eli Lilly.
Pfizer is on pace to report revenue declines of 12.9% for 2013, and analysts expect another 2.9% loss in 2014. Everyone knows that Pfizer lost its patent protection on Lipitor.
The company's new line of drugs such as Eliquis, to prevent blood clots, was expected to drive growth in 2014. However, after disappointing drug launches, including $12 million for Eliquis in the second quarter -- Eliquis had peak sales estimates of $4 billion -- analysts have since lowered their targets.
With that said, Lyrica sales remain strong, but more patent expirations from the likes of Celebrex are sure to plague the pharma giant. In a sense, Pfizer is enduring an industrywide event, although J&J has been able to weather this storm with strong partnerships and solid pipeline development.
Consistently giving back
Most are aware that large pharmas pay high dividends. These companies spend billions to develop drugs but once FDA approved most have particularly high margins. Therefore, large pharmas reward investors with strong yields.
J&J pays an annual dividend of 2.9%, which alone is not all that impressive. In fact, Pfizer pays a higher yield of 2.1% and Eli Lilly has an even better 3.98% dividend. However, what makes J&J's dividend a strength is its consistency.
In the last 25 years J&J has not once lowered its dividend and has increased its dividend on just about an annual basis.
Eli Lilly has not increased its dividend one-time in the last five years, and given its lost patents, there is reason to believe the company might actually lower its dividend in the next couple years. Moreover, Pfizer has lowered its quarterly dividend from $0.32 to $0.24 over the last five years.
In the same period, J&J has boosted its quarterly payout by 44%. This fact combined with its consistency makes J&J's dividend a reason to consider it and feel assured.
In today's market, momentum traders and fickle investors have created an excessive amount of volatility, which is understandable given a recession and a dot-com bubble in the last 13 years. However, J&J remains one of the few buy-and-hold investments that exist in the market; it's a relatively safe company with strong growth in multiple segments. Combined, these facts make J&J a good investment you should consider, regardless of short-term volatility in the market.
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