When it comes to healthcare, it simply doesn't get any bigger than Johnson & Johnson (NYSE:JNJ). With a market cap of $343 billion, J&J towers more than $140 billion in market value over the second-largest publicly traded healthcare company, Pfizer. And that growth didn't happen overnight. Since Jan. 1, 1970, Johnson & Johnson's stock has increased in value by 11,639%, through March 9, 2017.
For long-term shareholders it's been quite the ride, though investors thinking about getting in now might be wondering if J&J's best days are behind it. For those of you currently holding Johnson & Johnson stock, and those of you contemplating buying it, here are 10 reasons why J&J just might be the world's most perfect stock.
1. Company structure
One of the first things you'll note about Johnson & Johnson is that it's made up of more than 250 subsidiaries. The advantage of having so many working components is that it can divest assets that are slower-growing or no longer complement its long-term growth plan. Likewise, it can somewhat easily acquire new businesses and not have its acquisition (or divestment) activity disrupt the company's core operations. Few large companies are run as seamlessly as Johnson & Johnson.
2. Plans for 10 blockbuster drugs between 2015 and 2019
In 2015, Johnson & Johnson announced plans to file 10 New Drug Applications with the Food and Drug Administration between 2015 and 2019 for drugs it believed had blockbuster sales potential ($1 billion or more). This announcement followed a period (2009 through mid-2014) during which J&J had brought 14 novel medicines to market and had had seven of them achieve over $1 billion in annual sales. It's important for J&J to focus on pharmaceuticals since it's the company's highest-margin and fastest-growth segment.
Multiple myeloma drug Darzalex was the first of 10 aforementioned novel products, and it gained approval in November 2015. It wound up generating $572 million in full-year sales in 2016 and is on track, according to Genmab, which receives royalties from the sale of Darzalex, to hit $1.1 billion to $1.3 billion in sales in 2017. Genmab's CEO Jan van de Winkel also believes that Darzalex could "definitely" hit $9 billion in sales through future label-expansion opportunities.
3. Long-tail medical device opportunity
Even though Johnson & Johnson's medical device unit has produced subpar growth in recent years, J&J has a long-tail growth opportunity in the segment. With a strong focus on knee and hip replacements, as well as trauma, J&J looks poised to take advantage of a rapidly aging U.S. population.
According to the U.S. Census Bureau, the number of elderly individuals is expected to grow by more than 40 million between 2012 and 2050, to 83.7 million, and it's likely that these older Americans will need maintenance procedures to improve their quality of life as they age. Johnson & Johnson's leading position as a device maker should play well for its shareholders over the long run.
4. Healthcare product inelasticity
Johnson & Johnson's third core operating segment, healthcare products, also serves an important purpose for the company. Even though healthcare products are traditionally slow-growing, they provide a means by which consumers can form an attachment to the Johnson & Johnson brand. Most of its healthcare products are also somewhat inelastic, meaning consumers will buy them regardless of how well or poorly the U.S. economy is performing. This leads to an operating segment with very predictable cash flow, which Wall Street and investors tend to appreciate.
5. Nearly unmatched dividend increase streak
There are dividend stocks, and there's J&J. While you can easily find more than 1,000 publicly traded companies that have paid their shareholders a dividend over the trailing-12-month period, you'll find that only a few dozen qualify as Dividend Aristocrats.
Dividend Aristocrats are publicly traded companies that have raised their annual payouts for at least 25 straight years. In Johnson & Johnson's case, if it raises its dividend next month, it'll be the 55th consecutive year it's done so. Fewer than 10 other publicly traded companies have raised their payout for more consecutive years than J&J. And, as a bonus, its 2.6% dividend yield is still well above the average yield for the S&P 500.
6. A focus on the shareholder
In addition to having increased its payout for 54 consecutive years and counting, Johnson & Johnson also diverts some of its operating cash flow to fund share buybacks. Repurchasing its common stock lowers the number of shares outstanding, which can inflate overall earnings per share and potentially make J&J's valuation seem more attractive to investors. In 2015, J&J announced a $10 billion share buyback that, when coupled with its dividend, helped boost its shareholder yield.
7. AAA credit rating
There are literally thousands upon thousands of publicly traded stocks for you to choose from; however, just two of them bear Standard & Poor's highest credit rating, AAA. Software giant Microsoft is one, and Johnson & Johnson is the other. The AAA credit rating, which is a higher rating than the U.S. government has at the moment, implies that Standard & Poor's has full faith in J&J repaying its debt. It also speaks to the company's prudent management team and its exceptional cash flow.
8. Huge free cash flow
Speaking of cash flow, you'd struggle to find a company that generates as robust an annual cash flow figure in healthcare as Johnson & Johnson. Between 2007 and 2016, J&J generated between $11.4 billion and $15.8 billion in free cash flow, in each year. This is why acquisitions have played such an important role for J&J and why it continues to fund healthy shareholders yields: because it has the free cash flow to do so.
9. Just nine CEOs in 121 years
Johnson & Johnson has a storied history that spans across 121 years since its founding in 1886. Yet, J&J has passed the torch to just nine chief executive officers (CEOs) in that time. While investing mogul Warren Buffett has often opined that great businesses can effectively run themselves regardless of whether an astute management team is in charge or not, J&J's consistency at the top has clearly played an important role in keeping the company on the right growth track over the long run.
10. Reputable brand
Finally, Johnson & Johnson has a reputable brand name that consumers have accepted with open arms. In 2014, the Reputation Institute, a consulting company located in New York and Copenhagen, surveyed 3,800 Americans on their feelings toward 150 large, publicly traded companies. Johnson & Johnson wound up ranking as the fourth most reputable company. Consumers trust the Johnson & Johnson brand, which can go a long way with all three of its product segments.
Johnson & Johnson is built for long-term success, which might indeed make it the most perfect stock in the world.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. The Motley Fool has a disclosure policy.