Divestment Is the Name of the Game for Johnson & Johnson

Recent news flow highlights the encouraging progress made by Johnson & Johnson (JNJ) as it seeks top-line growth.

Jan 19, 2014 at 4:15PM

Divestment, it seems, is a hot topic in the global health-care sector. A number of major health-care players are shifting their business strategies in one way or another and are seeking to offload various parts of their businesses.

Although company-specific, reasons for doing so usually make sense: slow growth in certain divisions, a strategic shift away from one product line or type, and a change in focus for a company are all valid reasons for divestment.

So it's encouraging to see that Johnson & Johnson (NYSE:JNJ) appears to be making continued progress with the divestment of what it deems to be its slower-growing products and businesses. Recent developments include news that it's close to offloading its blood-testing unit for just over $4 billion, with private equity outfit Carlyle Group being the mooted bidder.

If such a sale goes through (it is rumored to become a formal announcement as soon as this week), then it would be good news for Johnson & Johnson. Its revenue has stagnated somewhat over the past five years, with it being just 5.5% higher in 2012 than it was in 2008. Therefore, it clearly needs to change its strategy and focus on growing the top line, since costs haven't shown the same low growth over the past five years. This has led to a squeezing of profit, with earnings per share being 14.7% lower in 2012 than they were in 2008.

Nevertheless, Johnson & Johnson has shown impressive absolute share-price performance over the same period. Shares were around $57 at the end of 2008 and, having fallen to less than $50 in 2009, they have recovered to reach their current price of $95.

Of course, a comparison to the Dow over the five-year period highlights their relative underperformance, with the Dow delivering a capital gain of 91% and Johnson and Johnson adding just 66% over the same time period.

However, with a strategy to sell off lower-growth parts of the business (such as the blood-testing unit), Johnson & Johnson could be one to watch. Certainly, market forecasts seem to indicate that its low-growth days could be behind it, with the market expecting revenue to increase by just under 15% over the next three years -- around 4.7% per annum.

As I mentioned, Johnson & Johnson isn't the only global health-care company seeking to shift its strategy. GlaxoSmithKline (NYSE:GSK) is doing something similar with its consumer brands, with soft drinks Ribena and Lucozade being sold and the company using the proceeds to invest in research and development facilities, as well as refocusing on its drug pipeline. Although its pipeline is strong, the refocusing of internal capital could prove to be positive for the stock, since it may lead to higher growth rates for the top and bottom lines.

Similarly, Bristol-Myers Squibb (NYSE:BMY) recently announced that it's stepping back from its diabetes alliance with AstraZeneca (NYSE:AZN). Although diabetes drug development is a fast-growing space, the capital generated from the sale of its stake allows it to simplify its operating model and reallocate the capital to areas that it thinks could deliver increased long-term value for shareholders.

So divestment seems to be the name of the game, not only for Johnson & Johnson but also for GlaxoSmithKline and Bristol-Myers Squibb. As they continue to reallocate capital over the medium to long term, top-line disappointments over the past five years could prove to be a thing of the past.

Here's another stock with a lot of potential
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Peter Stephens owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers