In general, a recession occurs when the economy declines because people are buying fewer goods and services. With temporary business closures all over the world, recession fears loom large on the horizon, and investors are looking for the safest possible places for their hard-earned money.
Since not all stocks suffer equally during a recession, it pays to identify companies with demonstrated resilience. Johnson and Johnson (NYSE:JNJ) has not only survived six recessions in its 133-year history, it has thrived.
Johnson and Johnson, an icon in healthcare, runs a diversified business made up of three segments: pharmaceuticals, medical devices, and consumer products. It's likely you use the company's brands, such as Tylenol, Listerine, Band-Aid, and Neutrogena, several times a week.
How does recessionary performance check out?
In the last recession, the S&P fell as much as 57%, while shares of Johnson and Johnson fell 35% at most. Johnson and Johnson's diverse business model functions very well, as one segment can compensate if another segment struggles.
In the worst financial crisis of the last 80 years, the Great Recession, Johnson and Johnson increased earnings thanks to the nature of its products. Consumers continue to use pharmaceutical and consumer products in adverse economic conditions. That fact, combined with prudent management, means Johnson and Johnson outperforms the market during recessions. This is significant because it made it easier for shareholders to hold on to their shares in a down market while earnings and the dividend both grew.
Some companies have recession-proof businesses, and Johnson and Johnson is one of them. The company's earnings per share (EPS) results through the last recession illustrate its strength and quality of management:
- 2006 adjusted EPS: $3.76
- 2007 adjusted EPS: $4.15 (10.4% increase)
- 2008 adjusted EPS: $4.57 (9.2% increase)
- 2009 adjusted EPS: $4.63 (1.3% increase)
Notching 36 consecutive years of adjusted operational earnings growth is impressive, but paying -- and raising -- a dividend for 57 consecutive years is jaw-dropping. Only a tiny handful of U.S. companies have been able to do the same.
Times change -- what about future forecasts?
But what about future expectations? Fiscal year 2019 results were in line with historical growth, and fiscal year 2020 guidance projects 5.5% sales growth and expanding margins. The company's future looks solid.
The healthcare field is a dynamic investment sector. Johnson and Johnson has not sat on its laurels but has evolved as the years have passed. The major drivers five years ago included diabetes management, Remicade (autoimmune drug), Zytiga (prostate cancer drug), and Invokana (diabetes drug).
Today, the major drivers are surgical and orthopedic robotics, electrophysiology, Tremfya (psoriatic arthritis drug), Darzalex (multiple myeloma drug), and Erleada (prostate cancer drug).
When the company did fiscal year 2020 forecasts, management didn't have any information to factor in Johnson and Johnson's efforts in fighting COVID-19. That's a potential wild card, but even without it, 2020 performance can be expected to be solid.
Johnson and Johnson's efforts to defeat COVID-19
The company began work on a COVID-19 vaccine in January, as did several other companies. In a CNBC interview on March 17, Dr. Paul Stoffels, Johnson and Johnson's chief scientific officer, said the process is being significantly expedited, and management hopes to begin human clinical trials on a COVID-19 vaccine in early November.
"We are making significant progress and very, very fast," Stoffels said.
Dr. Stoffels expects a candidate vaccine to be selected by the end of March. The next stage would be pre-clinical studies.
Simultaneously, Johnson and Johnson will be setting up for widespread production of the vaccine "in order to have large quantities available early next year," Stoffels said.
Dr. Stoffels expects to use the same vaccine platform used most recently for Ebola, leveraging a proven existing system that allows for maximum speed and accuracy.
What does this mean for investors?
When market panics happen, they are indiscriminate. Johnson and Johnson shares have been beaten down along with the rest of the market, although this company outperforms the market during recessions. With a price-to-earnings ratio (P/E) of 24 versus the industry average of 28, it actually looks undervalued.
During this unfortunate health crisis, investors have been handed a silver lining: the chance to invest in a profitable, growing healthcare company at prices near 52-week lows. This is a great opportunity to buy a well-run company you can hold forever.