Johnson & Johnson (JNJ -1.82%) has been a profitable business to invest in over the years. But its legal concerns have been growing -- the company now faces tens of thousands of lawsuits relating to its talc products alone. And while the healthcare giant has so far been able to handle its legal costs and remain profitable, in the future that may not be the case.

In addition, all this negative press isn't doing Johnson & Johnson's brand any favors. A constant barrage of recalls and lawsuits can cause real, long-term damage. Is this still an investable business, or have Johnson & Johnson's legal problems made this a stock to avoid at all costs?

The silhouettes of three people are seen at a long table.

Image Source: Getty Images.

The company's problems continue to mount

In recent years, Johnson & Johnson has been involved in many lawsuits. Here are a few of the more noteworthy items:

  • In 2020, a court fined the company $750 million for damages relating to four plaintiffs who claimed its baby powder products contained talc that led them to develop cancer. And the litigation isn't close to being over -- there are over 30,000 further plaintiffs that the business could potentially have to pay.
  • Multiple states have sued Johnson & Johnson for its role in the opioid crisis. Along with fellow defendants McKessonCardinal Health, and AmerisourceBergen, the company has been negotiating a settlement with state attorneys general that could top $26 billion (Johnson & Johnson's portion would be $5 billion). However, all parties haven't agreed on that, and it's still possible that the figure could go higher.
  • Last year, a judge ordered the company to pay $344 million for misleading consumers about the safety of its pelvic mesh products.

Most recently, earlier this month the company issued a voluntary recall of some Neutrogena and Aveeno sunscreen products. Although benzene, a known carcinogen, is not an ingredient, it was found in product testing. Johnson & Johnson is making the recall "out of an abundance of caution."

Earlier this month, the U.S. Food and Drug Administration (FDA) issued a second warning on Johnson & Johnson's coronavirus vaccine. It states the vaccine can increase the risk for a person to develop a neurological condition called Guillain-Barré syndrome. Previously, the agency had also issued a warning saying the vaccine increased the risk of blood clots. (The FDA has also issued warnings related to Pfizer and Moderna's COVID-19 vaccines, stating they increase the risk of heart inflammation.)

These issues haven't caused problems for Johnson & Johnson's financials -- yet

In both 2020 and 2019, Johnson & Johnson's litigation expense was more than $5 billion. However, in each of those years, the company's net earnings came in at about $15 billion. And as a percentage of revenue, the company has netted an 18% profit margin -- only slightly less than the 19% net margin it achieved in 2018.

From a strictly financial perspective, the business hasn't felt much of an effect on its bottom line as of yet. When Johnson & Johnson released its latest quarterly numbers on July 21, its profit for the period ending April 4 looked as strong as ever, coming in at over $6 billion.

But with more and more issues to worry about, it's certainly possible those litigation expenses could soar higher in the years ahead. And there are rumors that the company is looking ahead to potentially limit some of that liability. According to a report from Reuters, Johnson & Johnson is looking at dumping its liabilities related to its talc baby powder products into a new business and then putting that business into bankruptcy protection. The move would help to limit the company's legal obligations relating to that issue.

Why I would steer clear of Johnson & Johnson

Johnson & Johnson is an incredibly profitable company, and the stock is a Dividend King that you can likely count on for continued payments for the foreseeable future -- assuming, of course, that its legal bills don't start to erode its ability to meet those obligations. Right now, that doesn't appear to be an issue.

However, investors should be careful not to rely solely on past results or on the company's ability to weather the storm thus far. The more problems that come to light, the more potential there is for financial loss for the business in some form. We can't know whether there will be a specific straw that breaks the camel's back, and admittedly it looks highly unlikely right now that Johnson & Johnson won't be able to survive these challenges given its sheer size.

But simply surviving isn't going to make this a great investment. And there are also the intangibles to consider, such as the impact this bad press has on the company's future and whether it may lead to consumers switching to competing brands. That, combined with the potentially mounting legal costs, creates some long-term risk here that investors shouldn't simply ignore. And if the company looks to shirk its responsibility to consumers who have had serious health problems relating to its talc products, then that may turn off potential investors from an ethical standpoint.

While Johnson & Johnson is doing well right now, there are simply better options out there for investors, ones that don't possess nearly the same long-term risk.