Johnson & Johnson Parties Like It's 1982

A contamination of Johnson & Johnson's (NYSE: JNJ  ) Tylenol in 1982 nearly killed the brand. Someone tainted bottles of the drug long after it left Johnson & Johnson's facilities.

A short-term-thinking company would have blamed the cops for not catching the individuals responsible for the poisoning. Not Johnson & Johnson. The company recalled all of the Tylenol at a cost of millions of dollars, and then relaunched the drug with tamper-resistant packaging.

The decisive action allowed Johnson & Johnson to regain consumers' confidence and grab a hold of the consumer market.

Fast-forward nearly three decades
Johnson & Johnson's current fiasco is mostly the company's fault. From shipping pallets causing musty odors to drugs that don't have the correct amount of active drug, there's little doubt that Johnson & Johnson screwed up.

The solution the company is taking is the same as it was in 1982, albeit on a larger scale: recall any and everything that could be a problem and relaunch it better than before.

Since the initial issues arose, Johnson & Johnson has gone through all its products to ensure there aren't any additional problems. It's found more than I've been able to keep track of, from serious quality control issues to less mundane issues of not listing on the bottle that there was a minute amount of alcohol in its Tylenol Cold Multi-Symptom.

The culmination -- one can only hope -- came last week when the company announced that it was recalling 667,632 packages of Sudafed tablets because the instructions contained a typo: a repeated word in the instructions: "do not not divide, crush, chew, or dissolve the tablet."

While the double negative technically means that you should do it, no one seems to have been hurt if they did take the advice literally. Still Johnson & Johnson made the recall as it's clearly trying to clean up any and every mistake it's made over the last few years.

This is getting costly
Last year the recalls cost the company $900 million in lost sales. That doesn't include whatever Johnson & Johnson is going to have to spend to get consumers back.

Steep discounts close to the price of generics? Coupons? Whatever the company decides, it isn't going to be cheap.

Will it work?
I think the strategy of getting all the issues out on the table is a good one. At the very least, the multitude of recalls has caused consumers to become numb to the problems. "Look Mabel, Johnson & Johnson issued another recall. And also the sun came up in the east today."

The problem is how do you win back the consumers that have headed to competing products sold by Bayer, Merck (NYSE: MRK  ) , and Pfizer (NYSE: PFE  ) as well as generic over-the-counter drugs made by Perrigo (Nasdaq: PRGO  ) ?

Johnson & Johnson's thorough cleaning of the house should give consumers confidence that the company has eliminated all the quality-control issues, but once it's done, it's going to have to relaunch in a major way.

Investors also have to be concerned about how the recalls in the consumer division is affecting the company's reputation with doctors that prescribe its other products. That's especially an issue in the medical device space where replacing a faulty product is more complicated than returning it to your local drugstore. If Johnson & Johnson can't keep its reputation among doctors, other medical device makers like Boston Scientific (NYSE: BSX  ) and Medtronic (NYSE: MDT  ) are going to cut into its market share even where it hasn't recalled any products.

Bad news buy?
You could do worse. The solid 3.6% dividend yield should prop up the company's share price. Just be conscious that the dividend could be all the increase in value you see over the next year or so.

It'll likely be years before we know if Johnson & Johnson was able to repeat its comeback. If it can, investors will be playing Survivor's 1982 hit Eye of the Tiger all the way to the bank.

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Johnson & Johnson and Pfizer are Motley Fool Inside Value picks. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Optionshas recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson, and Medtronic. Motley Fool Alphaowns 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.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On February 28, 2011, at 10:54 PM, PeyDaFool wrote:

    I would be thrilled if JNJ stayed the same price or even decreased over the next ten years so long as they keep faithfully dishing out that dividend. I'm looking to hold long term so the longer the price stays subdued, the greater power in dividend reinvestment and compounding.

    PeyDaFool

    (Looking to retire in 2050)

  • Report this Comment On March 01, 2011, at 4:00 AM, McFlipp wrote:

    Fully agree with you, PeyDaFool! I'd love that as well :)

    (Looking to retire in 2035)

  • Report this Comment On March 01, 2011, at 7:37 AM, retiredpharma wrote:

    BO,

    The above "McFlipp and pay da fool" plan to retire in the way out years! I am already retired from the very Industry they are so enthralled with a la JNJ!

    JNJ is about to get spanked BIGTIME...I see a mid 50s low coming, maybe worse. I will consider your Eye of the Tigre run than....JNJ has lost much of the shine they once enjoyed and Weldon must go imo! It starts at the top and he should be on everyones WALL OF SHAME!

    Smart money was LEAVING JNJ in early January at 63+....

    I have made a tidy sum the last time I played the big JNJ spread which was a low 47 buy in early March 2009...I held it for several months till July 2009 and sold all at 62+....now that was about a $15 spread and 3K shares so I netted about $45K plus the DIVIs the above are bragging about!

    I could have done what the two above are saying which is "buy and hold and reinvest the divis"...

    Are they serious? Wow..Im glad they are NOT managing my Money!

    We are setting up for another slow descent into oblivion w/ JNJ and I will have cash ready when its TIME to buy again!

    They better have already taken care of business INTERNALLY before I invest again or its so long JNJ...they need a check up from the NECK UP FAST!!!

    I am long PFE, BMY and MRK in the meantime!

    retiredpharma

  • Report this Comment On March 01, 2011, at 8:21 AM, Stocklovr wrote:

    From the sound of the article and replies, you'd think that the product recalls are a huge part of JNJ's business. I found a chart online that shows that this business segment (consumer products) is 24% of their business. Not all of the 24% has issues. The vast majority of their business in unaffected. I'm more concerned that they deal with everything quickly and repair their reputation. I think that's the greatest risk right now.

    http://www.wikinvest.com/stock/JOHNSON_%26_JOHNSON_%28JNJ%29

    While these product recalls are not good, I don't think it's the end of the world. This is a mamoth company and only a small part of it is affected. This is not helping their reputation but, I believe, this too shall pass.

  • Report this Comment On March 01, 2011, at 4:48 PM, Dividendpartisan wrote:

    I agree with Stocklovr. I don't expect the stock price to be any more affected than it already has been (which by the way, isnt too much).

    DivPartisan

    www.dividendpartisan.com

  • Report this Comment On March 01, 2011, at 4:49 PM, Dividendpartisan wrote:

    I agree with Stocklovr. The recalls just won't hurt the company to the extent that people are worrying. As long as there isn't more drastic recalls, JNJ will be fine.

    DivPartisan

    www.dividendpartisan.com

  • Report this Comment On March 05, 2011, at 11:15 PM, nbrskhskr wrote:

    I agree with Stocklovr. I don't want to see the stock price flat for 10 years just to get dividends McFlipp and PeyDaFool although I did buy JNJ in large part for the dividend yield. That said, I think the price of the stock already takes into account this issues of last year so assuming they right the ship, the stock price will be fine. Either which way, the issues are in a fraction of a fraction within the company. They don't cross the entire company's scope and they don't even cover an entire section of the company. It was a big hit but I think the price reflects the hit.

    I would agree with retiredpharma that it is time for a change at the top. I think a new CEO would easily add 2 or 3 points to the stock... assuming it is a solid choice.

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