Healthcare giant Johnson & Johnson's (JNJ -0.43%) talcum powder litigation has hung over the company like a cloud for years. Could the storm soon pass? J&J recently announced it would settle with tens of thousands of plaintiffs in an agreement worth $8.9 billion.
The settlement isn't final, and some investors may avoid the stock altogether because of the harm the company is alleged to have caused. Still, even if the total costs change when all is said and done, the announcement at least gives investors a hard number to digest and move forward with.
Issues of morality aside, there's good and bad news about Johnson & Johnson's future. Here's what you should know before buying or selling.
The good news: Johnson & Johnson will survive
The lawsuit against Johnson & Johnson is very serious. The company's talcum powder allegedly hurt people, and the size of the settlement underlines the severe nature of the litigation. Making matters worse is that Johnson & Johnson is already paying $5 billion over nine years for its role in the opioid epidemic.
The impact on J&J's reputation will only be known over time, but the company will survive the financial impact of these lawsuits. As with the opioid settlement, the talcum settlement would be paid over time, 25 years in this case. Johnson & Johnson has $23.5 billion in cash on hand -- plenty to pay its obligations:
JNJ Cash and Short Term Investments (Quarterly) data by YCharts.
The company's dividend, which has grown for 60 years, doesn't seem at risk of a cut or freeze. The cash dividend payout ratio is 68%, a manageable expense for a profitable company like this. If you've owned the stock or wish to because of its slow and steady (but reliable) nature, it doesn't look like anything changes here.
The bad news: The company's problems go beyond litigation
Instead of focusing on the litigation alone, zoom out and look at Johnson & Johnson's big picture. The company's been a multidecade winner, but it's grown large enough recently that growth is becoming increasingly challenging.
You can see below that revenue growth has dropped in recent quarters, well below the company's long-term average. Additionally, analysts believe Johnson & Johnson's earnings per share (EPS) will grow at around 5% annually over the coming years.
JNJ Revenue (Quarterly YoY Growth) data by YCharts
That earnings growth isn't going to get anyone excited. And the current dividend yield of 2.7% falls short of most Treasury bonds, which don't have a risk of capital losses as long as you hold until maturity. A consistent Johnson & Johnson would probably deliver on expectations -- but modest growth could mean the stock consistently underperforms the market, barring a spark the company doesn't have right now.
The stock isn't a must-have at this price
Solid returns would be much easier if shares traded at a bargain-basement valuation, leaving room for price gains. Johnson & Johnson trades at a forward price-to-earnings ratio (P/E) of nearly 16, a notch below the S&P 500's P/E of 18. It's hard to justify a high valuation when your growth outlook is so light, so while Johnson & Johnson isn't eye-poppingly expensive, it's also not a must-have.
Investors buying today could see total returns of around 7% to 8% (earnings growth plus dividend) without any increase in valuation, which may be OK for risk-averse investors. However, there are still better opportunities out there.
It's best to concentrate on your best ideas when you put money to work in the market. Johnson & Johnson is a legendary dividend stock and perhaps will become more attractive in the future. But for now, the stock is more something to shrug about than something to get excited about.
