Johnson & Johnson (JNJ -0.46%) (J&J) is a renowned name in the healthcare and consumer goods industries. Band-Aids, Listerine, Neutrogena, and Tylenol are among its most well-known brands. The company has been around for over a century and has a strong global presence. However, J&J, like all other growth stocks, is vulnerable to market ups and downs.
But what makes J&J appealing is that it allows investors to earn passive income even during periods of high market volatility. The company has received the prestigious title of Dividend King, which is awarded to companies that have increased their dividend annually for at least 50 years. In the case of J&J, it has consistently increased dividends for 61 years, demonstrating its commitment to keeping its business stable so that it can return wealth to shareholders.
Let's take a closer look at why now is a good time to buy Johnson & Johnson's stock.
Image source: Getty Images.
A solid foundation
Although Johnson & Johnson's consumer brands have a large and loyal customer base around the world, it only contributes a small portion of total revenue. The consumer segment will be spun off into a new company called Kenvue by the end of 2023.
Following the separation, J&J intends to concentrate solely on its pharmaceutical and medtech segments, which are its core businesses. Its pharmaceutical division produces a wide range of drugs, including immunology and cancer treatments. In 2022, the pharmaceuticals segment alone generated $52.5 billion in sales. In the most recent quarter, the segment accounted for 54% of total sales.
Immunology drug Stelara's international sales increased 16% year over year, totaling $2.4 billion in Q1. Tremfya, which is used to treat adults with moderate to severe plaque psoriasis, also increased sales by 8.4% year over year to more than $640 million in Q1. Darzalex (used to treat multiple myeloma) and Erleada (used to treat prostate cancer) together contributed $2.8 billion to total revenue in the first quarter. In addition, the company made $747 million in sales from its COVID-19 vaccine.
Total revenue for the quarter increased 5.6% year over year to $25 billion. The company's adjusted net profit fell slightly to $7 billion, down from $7.1 billion the previous quarter.
Management is enthusiastic about the company's newly launched products and anticipates rapid progress. Carvykti (used to treat relapsed or refractory multiple myeloma), Spravato (used to treat depression), and Tecvayli (used to treat multiple myeloma) are among the new drugs.
The company continues to spend diligently on research and development (which totaled $3.5 billion in Q1, accounting for 14% of sales) to develop new and innovative products.
Better growth prospects in the long term
In the long run, J&J's medtech segment could also be a growth driver. In December 2022, the company completed the acquisition of Abiomed, a provider of cardiovascular medical technology. Abiomed will operate as a separate entity within the medtech segment. In the third quarter, it contributed 4.6% of the segment's total sales.
J&J's entry into the robotic-assisted surgery market could give the segment a further boost. Minimally invasive surgeries are the future of surgery. Ottava, the company's robot-assisted surgery system, was introduced in November 2021. Management stated that the company is pleased with the system's progress and that more information will be provided in the second half of 2023.
Because of the strong start to the year, J&J revised its 2023 full-year guidance, expecting revenue to rise 5.5% to 6.5% to $97.9 billion to $98.9 billion. The company also expects to generate nearly $60 billion in pharmaceutical sales by 2025, which I believe is achievable given its strong product pipeline.
It's not too late to buy this stock
It is not too late to purchase this outstanding healthcare stock. Now that the company has separated its consumer segment, it can devote all of its time and resources to strengthening its pharma segment. The pharmaceutical business has risks because regulatory approvals can be delayed and clinical trials can fail. However, this is one industry that will always be in demand as long as companies use innovative methods to fight hard-to-treat diseases.
JNJ Free Cash Flow data by YCharts
Being a dividend stock adds to the company's appeal. J&J offers investors regular passive income with a dividend yield of 2.9%, which is higher than the S&P 500's average yield of 1.7%. Its payout ratio in the chart above reveals it paid around 68% of its free cash flow in dividends. J&J ended the quarter with $2.5 billion in free cash flow, sufficient enough to fund future dividend payments.
Along with the quarterly results, J&J announced a 5.3% dividend increase, marking it its 61st dividend hike.
Adding a stable stock like Johnson & Johnson to one's portfolio could provide some diversification. The stock is currently reasonably valued, making it an excellent time to buy before the spin-off is completed.
