It comes as no surprise that older people invest differently than younger people. Anyone in or near retirement should be looking for more stability, while those with time to ride out cyclical ebbs and flows can afford to take bigger risks. That means different groups generally prefer different stocks, or at least different kinds of stocks held in different quantities.
There are few individual stocks, however, that represent this generational divide as dramatically as Johnson & Johnson (JNJ 1.75%) does. Baby boomers may love it, but most millennials want nothing to do with it. The probable reason for the disparity is worth fleshing out, as what makes it compelling to older investors today may not apply -- or at least apply as well -- in the future.
An easy name to like from a distance
For the record, J&J isn't boomers' absolute most-owned stock. That honor belongs to behemoths Apple, Microsoft, and Amazon. Facebook is a fan favorite among older folks too.
This degree of ownership is more likely to be a function of sheer size and notoriety than a reflection of insight that only comes with age, however. See, these four names are just as heavily owned by much younger investors too.
Not so with Johnson & Johnson. Despite its whopping $426 billion market cap, the company was only the 44th most-owned stock as measured by Apex Clearing's Millennial 100 update for the fourth quarter of last year. That puts it one notch above another stodgy, old-school name struggling to find its place in the modern, digitally driven era: General Electric.
Why such a spread? Familiarity likely has much to do with it.
Think about it. Baby boomers, currently between the ages of 55 and 75, grew up using Johnson & Johnson branded products. Its baby shampoos were particularly popular when those individuals were young, and remained the go-to choice when those boomers had children of their own through the 1980s. Nostalgia counts for something.
Older investors are hardly oblivious to J&J's evolution, however. They know consumer products now only account for about 15% of its current revenue, while prescription drugs make up the lion's share of the top line. Last year, more than half of J&J's $83 billion in sales came from pharmaceuticals, with medical device outfits rounding out the other 30%. Older investors like this product mix too, as it provides multiple growth opportunities without imposing uncomfortably volatile results from one quarter to the next.
Perhaps the biggest draw to Johnson & Johnson, however, is how well it manages all of its different pieces to fund a reliable dividend that many older investors count on.
The stock's current yield of 2.5% isn't especially thrilling, to be sure. But the company hasn't failed to pay a dividend in any quarter for decades now, and has upped its annual payout for 58 consecutive years. This year could be the 59th. That doesn't just qualify the stock as a Dividend Aristocrat: Johnson & Johnson is also a Dividend King, and is one of the best-pedigreed picks among that small crowd of stocks.
A bunch of boomers may simply be betting the company will do anything it has to do to make sure it doesn't undo its dividend royalty status.
Baby boomers' affinity for J&J is understandable. Not only is it a brand many of them have seen on store shelves for most of their lives, it's a company with lots of built-in diversity. One could certainly do a lot worse than owning a piece of this particular outfit.
This isn't necessarily an outfit, however, that today's millennials and Gen-Xers will want to ease into once today's boomers are done with it. As an enormous company with several components that are decades old, signs of wear and tear are starting to show.
Yes, the litigation being levied against it for allegedly selling tainted talcum powder is one of these signs, though not the only one. Multiple acquisitions made over time are paying off less and less, while the debt taken on to get those deals done still lingers.
Johnson & Johnson spent a couple hundred million dollars making interest payments in 2020 to service the $32.6 billion worth of long-term debt, and that debt load doesn't include another $22.7 billion worth of employee-related and "other" obligations on its books. All those obligations grew last year.
The dividend coverage ratio is thinning, too. Even in a relatively normal 2019, the full-year payout of $3.98 ate up a sizable chunk of the $5.63 it earned per share, or 70% of profits, up from around 50% just five years ago and less than 40% 15 years ago. That leaves less and less income behind to invest in growth.
None of these challenges are insurmountable, and baby boomers who own it right now shouldn't necessarily feel pressured to shed it now or in the foreseeable future. In some regards, though (albeit nowhere near the same degree), Johnson & Johnson is looking a bit like General Electric did just a few years ago when years of bloat and complacency finally proved problematic. The little things add up over time.