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There's Always Room for This Blue Chip in Your Portfolio

By Anirudh Shankar - Updated Mar 18, 2021 at 7:34PM

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Through good times and bad, Johnson & Johnson has performed.

Johnson & Johnson (JNJ -0.89%) is a quintessential long-term holding, one that any investor can own through economic expansions and contractions. While it's most recently been in the news for its coronavirus vaccine, the company operates a wide array of businesses, including pharmaceuticals, consumer products, and medical devices. Even in recessions, its everyday products such as Band-Aids, Tylenol, Listerine, and Splenda are staples in customers' baskets. 

Johnson & Johnson usually trades at a slight premium to the market, with a historical average price-to-earnings (P/E) ratio between 20 and 25. Investors are currently presented with a unique buying opportunity given today's P/E of just 17, representing a significant bargain. You usually pay a premium for security, so given Johnson & Johnson's AAA credit rating from Standard & Poor's and its discounted valuation, this is a great opportunity to pick up some shares. 

A woman in a pharmacy considers various products.

Image Source: Getty Images.

The coronavirus vaccine ... 

Johnson & Johnson's coronavirus vaccine received Emergency Use Authorization (EUA) from the U.S. Food and Drug Administration on Feb. 27. The company plans to ship 100 million doses in the U.S. by the end of June and an additional 100 million by the end of the year. Merck has also stepped in to help with the manufacturing of the vaccine. As of March 12, the U.S had topped 100 million doses administered, meaning 13% of U.S adults had been vaccinated.

While the vaccine isn't the only factor affecting the future of the company, it is worth noting that Johnson & Johnson did receive $1 billion under its original contract with the U.S. government for the development and manufacturing of the vaccine. It's also worth pointing out that Johnson & Johnson's revenue in 2019 was $82 billion, so the contract for the vaccine would only represent a little more than 1% of its total revenue.   

... and the wide moat beyond

Beyond the vaccine, Johnson & Johnson's exposure to both domestic and international markets makes it easier for the company to ride out unforeseen events in any given area. About 52% of sales come from the U.S., with 23% from Europe and 18% from Asia. This should be encouraging news for investors, as it shows that the company has diversified its business across many markets, currencies, and demographics. Since 2010, its sales in European and Asian markets have grown at over 2.2% and 3.6%, respectively, per year. This gives Johnson & Johnson pricing power and the ability to maintain operating margins at a steady 24%.   

Its business lines are similarly diverse, with pharmaceuticals representing about 45% of total sales and medical devices and consumer products coming in at about 35% and 20%, respectively. Many investors know Johnson & Johnson more for its consumer products, but the company's pharma business is very competitive, too. Its latest blockbuster, Tremfya, for psoriasis, was introduced in 2017 and has been a fast grower. In this past year alone, sales were up 13.1%, and Tremfya brought in $327 million in revenue in just the third quarter of 2020.  

Value for prospective buyers

When trying to find companies to buy or add to, it is important to consider the value proposition involved. Warren Buffett famously said that "price is what you pay, and value is what you get." Johnson & Johnson is not a fast grower, but it does offer growth as well as value; through good times and bad, earnings have increased, and I can't see that trend stopping soon. It currently offers a 2.5% dividend yield, and its 10-year dividend growth rate is just under 6.5%. If you're looking for a healthcare investment you can rely on for many years to come, Johnson & Johnson is the stock for you. 

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$173.94 (-0.89%) $-1.56
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$92.09 (-0.01%) $0.01

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