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This Healthcare Company Provides Shelter From a Volatile Market

By Justin Cardwell - Oct 5, 2019 at 9:00AM

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Bad news is priced in, leaving behind value and growth.

Stability, solid financials, a whopping market capitalization, and consistent dividends -- hallmarks of blue-chip stocks -- are what income investors look for. The definition of a blue-chip stock, Johnson & Johnson (JNJ -0.48%) has paid a consistent dividend for 57 years and currently holds a market capitalization of $341 billion.

As the largest healthcare company globally, Johnson & Johnson has traditionally maintained a good reputation among both customers and investors. However, the company has recently been fighting off several lawsuits that have dropped the company from favor with investors unwilling to take a risk on an unexpected outcome. Before writing off the company altogether, let's look deeper into the current value and growth Johnson & Johnson provides.

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Current performance

Johnson & Johnson's revenue is the sum of three parts: consumer, pharmaceutical, and medical device sales. Adjusted growth in the second quarter -- after removing acquisitions and divestitures -- was 4.4%. Consumer sales growth was 2.3%, while medical device sales grew 3.2% and pharmaceutical sales grew 4.4%. Altogether, Johnson & Johnson reported a net income of $5.61 billion, a 42% increase year over year.

To give medical device sales a boost, Johnson & Johnson acquired Auris Health, a robotic surgery company, in February. Johnson & Johnson paid $3.4 billion in addition to milestone payments up to $2.35 billion. This acquisition wasn't cheap, but it was made to assist J&J in competing with the leader in the robotic surgery segment, Intuitive Surgical (ISRG -0.05%)

Johnson & Johnson has a solid balance sheet with a dividend of 2.9% that has been increased for 57 consecutive years, providing a 10-year compound annual growth rate (CAGR) of 7.03%. Investing in dividend growth at the current share value isn't outlandish, as Johnson & Johnson has a price-to-earnings ratio of 15.2, well below the sector median of 24.01.

Unknown outcomes

More than 14,000 lawsuits against Johnson & Johnson allege that a popular product, Johnson's baby powder, caused ovarian cancer and mesothelioma from exposure to asbestos within the powder. The company is fighting ongoing lawsuits in addition to a recent order to pay $4.14 billion in punitive damages to 22 families in Missouri -- which the company is appealing. 

Courts in different states may deliver different outcomes: A court in Kentucky rejected the claim that the product contained asbestos. Johnson & Johnson is currently involved in a federal case that could result in dismissal of most of the claims, but the judgment date is yet to be announced.

In addition, the Oklahoma Supreme Court ruled in a recent opioid lawsuit that Johnson & Johnson must pay $572 million in damages. The company said it would appeal the charges. Further damages are unknown, as this is an ongoing issue. The uncertainty poses an additional risk to share value until lawsuit outcomes are finalized.

Cautiously optimistic

Investors' stance on Johnson & Johnson is cautiously optimistic. From a 10,000-foot view, Johnson & Johnson is a great stock for income investors looking to diversify dividend holdings. Growth is healthy, as shown by its 42% year-over-year net income increase. And the recent acquisition of Auris Health should help Johnson & Johnson take a larger bite out of the fast-moving medical device industry.

Assuming the company doesn't experience astronomical penalties from the pending lawsuits, Johnson & Johnson provides value for income investors in growth and dividends. With a beta of 0.73 -- a measure of volatility against the market, lower being less volatile -- portfolios will experience less impact from market swings. Potential worst-case scenarios are priced into the stock price, creating an opening for healthcare investors willing to weigh risk and reward.

Justin Cardwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$166.77 (-0.48%) $0.81
Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
$229.59 (-0.05%) $0.12

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