Investors looking for low volatility and steady, reliable returns have been attracted to Johnson & Johnson (NYSE:JNJ) for decades. The company is a Dividend King, having raised its payout for 58 consecutive years. It's the model of a diversified healthcare company with $82 billion in annual sales, spread across consumer products, medical devices, and pharmaceuticals.

That size comes with benefits and drawbacks. While no one business unit can drag the company down, it's hard for management to keep the top line growing when its sales volume is already so high. In the last decade, the company has only averaged 3% revenue growth per year. Despite that, there are a few products that investors are hoping will reignite sales and cause Johnson & Johnson's stock to outperform the overall market for the next few years.

A road sign that reads "MILLIONAIRE next exit"

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A shift in focus

Currently, the pharmaceutical unit makes up 51% of the company's sales while medical devices contribute 32%. With consumer health revenue flat since 2015, the company is looking to the two larger units to drive future growth.

In 2019, Johnson & Johnson spent $3.4 billion on medical robotics company Auris Health and its CEO, the founder of Intuitive Surgical (NASDAQ:ISRG). This followed the 2015 joint venture with Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) Verily and the 2018 acquisition of a French company that develops surgical robots. Johnson & Johnson took control of the work with Verily and has been teasing a general surgery robotics platform for a few years. The six-armed device -- named Ottava -- was finally revealed in November. Management claims it will provide more control and flexibility than devices currently on the market. If you're a shareholder of Intuitive Surgical, there isn't much reason to worry yet. Human trials aren't planned until the second half of 2022. But there is a lot of opportunity for Johnson & Johnson. Robots currently account for only 2% of procedures worldwide -- 10% in the U.S. and less than 1% outside the country.

In pharmaceuticals, immunology and oncology provide the most sales and growth for the company, and recent moves indicate a focus on these areas.

Area 2019 Revenue YOY Growth
Immunology $13.95 billion 6.3%
Infectious diseases $3.41 billion 3.3%
Neuroscience $6.33 billion 4.1%
Oncology $10.69 billion 8.6%
Pulmonary hypertension $2.62 billion 1.9%
Cardiovascular/metabolism/other $5.19 billion (10.7%)

Data source: Johnson & Johnson. YOY = year over year. Table by author.

In immunology, the company has introduced drugs to offset the decline of Remicade -- a treatment for plaque psoriasis, arthritis, Crohn's disease, and ulcerative colitis -- as its market share is eroded by generic competition. While Remicade sales fell almost $1 billion in 2019, replacements Stelara and Tremfya grew 23% and 86%, respectively. Those two added $1.7 billion in revenue in 2019 compared to 2018. In August, the company acquired Momenta Pharmaceuticals for $6.5 billion. Johnson & Johnson hopes to expand on Momenta's drug candidate nipocalimab, the monoclonal antibody for treating a serious blood disorder in a fetus or newborn, to treat other autoimmune diseases.

The company is also fighting share loss to generics in its oncology segment. While sales of prostate cancer drugs Zytiga and Velcade dropped $1.1 billion in 2019, replacement Erleada is starting to fill the void. In the first three quarters of 2020 the drug brought in $143 million, $170 million, and $200 million, respectively. Darzalex, a drug for multiple myeloma, grew 48% in 2019 to $3 billion in revenue. Sales should continue to grow as the company explores new indications. In December, management presented data at the American Society of Hematology that showed the drug, in combination with others, reduced the risk of death in patients with amyloidosis by 37%.

The company's infectious diseases area grew $3.4 billion in 2019, and a deal is already lined up anticipating the approval of a single-dose COVID-19 vaccine. In August, the company agreed to supply the U.S. with 100 million doses for $1 billion, with an option for 200 million more doses.

If everything goes right

Looking back at how the market has valued a company's sales or earnings and trying to estimate that number for the future helps ground any expectations in reality. During the past three years, the market has valued Johnson & Johnson at between 17.5 and 20.5 times operating profit, while the operating margin -- operating profit as a percent of sales -- has been steady at 24.5%. That's the kind of stability investors expect from a mature company like Johnson & Johnson.

If sales in consumer health remain flat, and the pharmaceutical and medical device units are able to get back to their average growth over the past few years from new drugs and devices -- 7.8% and 1.8%, respectively -- the company could achieve $110 billion in sales for 2026. As the two higher-margin businesses make up a larger portion of revenue, the company's operating profit would increase faster. At the current multiple, that rosy scenario would give the company a market capitalization of $492 billion in six years. That's only a 5.8% annual return.

The stock market has returned an average of 10% per year over the last century, but many investors would accept the lower return if it comes with less risk. Almost every forecast will be wrong -- the only uncertainty is by how much -- but doing some math can make it easier to decide on a stock and monitor its progress. Investors counting on Johnson & Johnson to make them a millionaire should probably start with a lot of money and have plenty of patience.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.