Johnson & Johnson (JNJ -0.69%) is making another effort to resolve the lawsuits related to its talc baby powder products. Tens of thousands of lawsuits have been filed asserting that asbestos in those talc products caused cancers among the people who used them. This time, the company is allocating billions more to address the claims than it offered in its previously rejected bid.
While its new offer would be a hefty price to pay to put these issues behind it, here's why the substantially increased proposal is good for the company and its investors.
It's likely less than it would have had to pay out
In 2021, Johnson & Johnson created a new subsidiary to take on its talc business, as well as the liability for the asbestos-related lawsuits. It then attempted to put that subsidiary into bankruptcy, which would have had the effect of freezing the litigation.
In January of this year, however, an appeals court judge tossed out that effort, so now Johnson & Johnson is making a second attempt to settle the cases. This time, rather than a $2 billion settlement fund, the healthcare company is proposing a settlement worth at least $8.9 billion. It's an offer that, according to the company, a majority of the plaintiffs support.
If the bankruptcy courts approve the move, it would be great news for J&J shareholders because there's a real possibility that if it winds up fighting through all of those cases in court, the healthcare company could very well end up paying more. There are over 60,000 claimants involved, and estimating the potential cost of settling those cases plus the associated legal fees would be next to impossible. Further, the number of people involved could increase.
Consider that in a previous ruling, a court awarded $2.1 billion to 22 women who developed ovarian cancer as a result of using Johnson & Johnson's talc-based products. While this doesn't mean that every case would end with a similar level of payouts per plaintiff, that one involved just 22 people. Absent a settlement deal, the total liabilities Johnson & Johnson could face over the years could be vastly more than that, potentially in the hundreds of billions of dollars.
As such, the company has a huge incentive to settle the issue, especially if it's a manageable amount, as it will also help eliminate the dark cloud hanging over the business. And what makes it particularly manageable is the term of the settlement.
The settlement is over a 25-year period
The actual amount Johnson & Johnson proposes to settle on is $12 billion, but $8.9 billion is the present value of that settlement. That's because if the settlement deal is approved, Johnson & Johnson will be able to spread its payment out over a period of 25 years, so the total value becomes less in today's dollars.
For Johnson & Johnson, that would make the settlement even easier to manage. If $12 billion in outlays were equally spread out over 25 years, it would amount to $480 million per year. Johnson & Johnson generates well in excess of that on a yearly basis. The lowest annual free cash it has reported in the past decade has been over $13 billion -- enough to cover the entire settlement amount.
JNJ Free Cash Flow (Annual) data by YCharts.
Does this make Johnson & Johnson stock a buy?
If the majority of plaintiffs is indeed in favor of this settlement offer, this is a positive development for Johnson & Johnson. However, to reach approval, the deal will need agreement from 75% of the plaintiffs. If it fails to get that many yes votes, perhaps raising the proposed payment to $20 billion or $25 billion would be enough -- and even those amounts could be manageable for the company.
Either way, it appears that Johnson & Johnson is on a path that will finally put this issue behind it. As such, although the settlement isn't a done deal just yet, Johnson & Johnson does look like a safer investment than it did before this news broke. After the news of the improved offer became public, the healthcare stock jumped, but it could still climb higher.
Indeed, despite that pop, the stock remains near its 52-week low. Plus, Johnson & Johnson is spinning off its troubled consumer health business this year, which should make the remaining company (which will include its pharmaceutical and medical device units) a better buy overall as those are higher-growth businesses.
If you're a long-term investor, now may be an ideal time to buy shares of Johnson & Johnson as there's definitely a bit less risk today surrounding the stock.
