Johnson & Johnson (JNJ -1.20%) has come under fire this year, facing some big fines. After being saddled with a $572 million fine related to opioids a few months ago, the pharmaceutical company is now facing a newer, larger fine. Earlier this month, jurors awarded a man in Philadelphia $8 billion in punitive damages, which will leave a big dent on its financials. That fine was in addition to the $680,000 he had already won because Johnson & Johnson failed to warn young men that they could grow breasts if they used its drug Risperdal.
While the fine will likely be reduced once the company appeals, this could be another sign for investors that Johnson & Johnson may be too big a risk to own today. With more than $15 billion on its books the company can absorb these penalties, but they aren't an expense that investors want to see.
Why the penalties could become even stiffer
The danger for Johnson & Johnson investors is that if more cases come to light, they could lead to even larger fines for the company. These cases could set precedents and result in other states and other victims looking for big settlements. Opioids, in particular, have been a hot topic in the U.S. for years. In 2017, more than 47,000 people died as a result of opioid-related overdoses. And as these numbers continue to rise and more people are affected, a company like Johnson & Johnson that's already been the center of one high-profile case could soon see more people go after it.
And it's not just opioids that are a problem for the company: Johnson & Johnson is also facing thousands of lawsuits because its baby-powder products allegedly caused people to develop ovarian cancer. To make matters worse, this is not just a case of the company not knowing; a criminal investigation has also been opened, looking into whether J&J did enough to protect consumers and whether it covered up the issue.
If a coverup is involved, the baby-powder scandal could be the most damaging one that Johnson & Johnson faces. This is about more than just fines and penalties. The long-term effect could be that consumers lose trust in the brand and look to alternatives, and that could be much more devastating to the company.
Strong earnings results aren't enough to get investors excited
Johnson & Johnson released its quarterly results last week. Although the company beat expectations for revenue and earnings and raised its guidance, the stock saw only modest gains.
Normally, all that positivity would be great news for a stock. But investors are showing restraint, knowing that the problems the company is facing are large and that it will take a lot more than good earnings results to fix them.
What should investors do?
Amid all the legal uncertainty that the company is facing, Johnson & Johnson is a stock that investors may want to steer clear of for now. While the blue-chip stock may look like a solid investment, especially for dividend investors looking for long-term recurring income to add to their portfolios, there are better options among the many dividend stocks to choose from.
These problems may take years to sort out, and the stock could continue to suffer. Over the past two years, the share price of Johnson & Johnson has fallen by more than 6%, failing to build on any momentum. The risk for investors is that any new lawsuit or legal battle could undo any progress that the stock achieves from here on out. That's simply not worth the risk, especially for a stock that hasn't generated strong returns for investors anyway.