There are plenty of reasons why many investors enjoy holding shares in Johnson & Johnson (JNJ 0.15%), one of the world's largest healthcare businesses. With the company's impressive track record of dividend payments and its pipeline's massive throughput of new medicines, it's clear that this stock will be around for the foreseeable future.
But even if it's a stalwart for many portfolios, it isn't perfect. Let's examine two major reasons that make the stock worth purchasing, and two reasons that might make it better to sell or avoid.
NYSE: JNJ
Key Data Points
1. Its business is remarkably resistant to inflation
Johnson & Johnson's product mix makes it worth buying in times like now when inflation is higher than average. Some of its core offerings are branded consumer health goods like Tylenol and Band-Aids, for which there's well-established and highly durable demand. Even when the economy is showing signs of struggling mightily, as during the fourth quarter of 2022, its consumer health segment still grew by 1% on a reported basis, reaching more than $3.7 billion.
That means investors can have a measure of confidence in the business's ability to survive hard times. After all, its products are in everyday use for huge swaths of the population, and its brands are often so strong that they've been household names for decades. Brands serve as a competitive advantage as they help to protect market share against encroachment from competitors.
Johnson & Johnson will be spinning off its consumer health business into a new entity called Kenvue sometime this year. However, investors who buy shares before the spinoff will get shares of the new company as well as the older entity that'll retain the J&J name. Even afterward, its offerings of pharmaceutical medicines and medical devices should be fairly inflation-resistant as the new business can often hike prices to keep its margins static if input costs rise unexpectedly.
2. A long history of rewarding shareholders
Johnson & Johnson is a great stock for most investors because it has a strong history of rewarding shareholders for their contribution of capital.
It pays a dividend with a forward yield today of roughly 2.7%, and it also does regular share buybacks; over the last 10 years, the company repurchased an average of $1.4 billion worth of its shares per quarter. What's more, the company just hiked its dividend for the 60th consecutive year, and management expects to continue with those hikes even after J&J spins off its consumer health division.
Over long holding periods, the constant drumbeat of dividend hikes and share repurchases can pay off big. In the last 20 years, J&J's total return rose by 433%, while its payout grew by 451%. That means if you're patient, you can build a small income stream from your shares -- or use a dividend reinvestment plan (DRIP) to gradually build up a much larger position.
Now, let's examine a pair of reasons to sell or avoid this stock.
1. The talc powder settlements are looming
One decent reason to sell Johnson & Johnson stock today is that its innovative plan to resolve paying out legal settlements has foundered, likely leaving it on the hook for potentially billions of dollars in restitution payments. In case you're not familiar, approximately 40,000 lawsuits have been filed against the company, alleging that its baby powder products cause cancer.
J&J sought to create a subsidiary that would accept the liability and then enter into bankruptcy. But on Feb. 1, the 3rd Circuit Court of Appeals put a kibosh on that plan, so now it looks like the legal battles will continue on for quite a bit longer, which should be a concern for shareholders.
2. Slow growth
J&J's anticipated pace of slow growth is another decent reason to consider selling your shares. Even counting the impact of reinvesting dividends and benefiting from dividend hikes and share repurchases over the last 20 years, the stock still didn't outperform the market, which had a total return of nearly 580%.
There's little reason to expect J&J's growth rate to change dramatically, though the spinoff should boost top-line expansion by a bit.
But the issue isn't that the company's growth strategy is sub-optimal. It's simply very difficult to continue growing a business when the top line starts to push $98 billion, as management predicts it will in 2023. Reaching growth even in high single-digit percentages requires it to bring in billions and billions more each year.
Even with J&J's massive drug development pipeline churning out new medicines onto the market after getting regulatory approval, it's hard to make enough money to expand at the same pace as a smaller business just starting to penetrate its markets. So if you're looking for a quick buck from an investment, this isn't the best stock for you.
