The Bear Case Against Johnson & Johnson: Does It Hold Water?

The company doesn't hold much promise for growth. Does that mean it should be avoided?

Apr 24, 2014 at 9:30AM

During an eight-year run from 1994 to 2002, shares of health-care conglomerate Johnson & Johnson (NYSE:JNJ) surged 500%. During that time, the company, which owns some of the most iconic brands in the industry, became a force to be reckoned with.

Since then, however, shares have only averaged 4% growth per year. With such tepid movement, is it even worth owning shares of this giant?

Screen Shot


Every spring, I review all of my stock holdings to see whether or not they still warrant space in my portfolio. Currently, Johnson & Johnson accounts for 5% of my overall holdings.

Because I'm loathe to sell stocks, I consider the most salient -- though general -- arguments that bears put forth and see how I feel about them.

When it comes to Johnson & Johnson, there's one primary drawback that investors point to, but it's a big one. Here's what it is and how I feel about it.

The company is simply too big to beat the market. Heck, it kind of IS the market.
Currently, Johnson & Johnson is valued at $285 billion. Because an S&P 500 exchange-traded fund like SPDR S&P 500 ETF (NYSEMKT:SPY) is weighted to give more influence to larger companies, Johnson & Johnson's stock accounts for 1.7% of the ETF. That's the fifth-largest allocation, and by far the highest for a health care company.

Obviously, when a company gets that big, it becomes much harder to outperform the broader market. Revenue growth has plodded along at a 6% rate last year, while earnings ticked up 8%. Those are certainly respectable numbers for a company the size of Johnson & Johnson, but surely, there are better places for your money, especially considering the stock now trades hands for a pricey 18 times earnings.

My take: Don't forget the power of dividends in boosting your returns.
It's true, I have no illusions of Johnson & Johnson producing multibagger returns for my portfolio. But I, like many Foolish investors, have a part of my portfolio that's dedicated to growth stocks like that.

Johnson & Johnson, on the other hand, occupies a part of the portfolio that's dedicated to businesses that have significant moats around them and pay out hefty dividends that add up over time.

On the moat front, Johnson & Johnson has three different divisions. The consumer division -- which is the most well known for brands like Band-Aids and Neutrogena -- accounts for 21% of revenue. These products are well entrenched with customers and provide reliable, if slow, cash flow increases.

The other two divisions -- pharmaceuticals and medical devices -- may be less well known to the average investor. Because the company has deep pockets, it can buy up companies or patents that present powerful future earnings potential. Though these two, especially pharmaceuticals, can be hit or miss, they provide a modicum of growth potential for investors -- particularly pharmaceuticals, which delivered almost 11% revenue growth last quarter.

When it comes to the dividend, there's a lot to like. Remember when I said Johnson & Johnson had only returned 4% per year since 2002? The blue line below represents that figure. But when we add in the effect of the company's dividend, the story -- represented by the orange line -- changes quite a bit.

JNJ Chart

JNJ data. Source: YCharts.

With this new figure, the stock and its dividend delivered average annual returns of almost 7%, a much more respectable return for such a solid investment.

Even more important moving forward, the company has raised its dividend for 51 consecutive years. Currently, it uses a little over half of its free cash flow to pay out its 2.7% yield. That means there's tons of room for growth in the dividend for years to come.

Sure, Johnson & Johnson might not be the most exciting stock to buy and hold, but it may be one of the safest, most profitable ones.

Speaking of great dividend stocks
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Brian Stoffel owns shares of Johnson & Johnson. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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