The bar to qualify as one of the largest companies in the world is constantly rising. This is because as publicly traded businesses continue to increase revenue and earnings, they become more valuable over time.
But a trillion-dollar market capitalization will likely rank a company among the largest in the world for a very long time. With a $427 billion market capitalization, Johnson & Johnson (JNJ -0.46%) is currently the 15th largest publicly traded business on the planet. But could the company realistically reach the 13-digit market cap milestone in 15 years? Let's examine the pharmaceutical industry and J&J's fundamentals to decide.
An encouraging industry growth forecast
Before considering Johnson & Johnson's potential, it's important to consider the state of the industry in which J&J primarily operates (pharmaceuticals). Sure, company quality matters a lot. But it's very difficult for a business to expand if it is operating in a dying industry.
Fortunately for J&J, the pharmaceutical industry isn't dying -- far from it. The global population is expected to grow from 8 billion in 2022 to 8.3 billion in 2027. Coupled with annual price hikes for products, this is why global pharmaceutical spending is projected to rise from $1.5 trillion in 2022 to $1.9 trillion by 2027.
Image source: Getty Images.
What J&J's path to a trillion-dollar market cap looks like
J&J is buoyed by a remarkably strong existing product portfolio. Taking sales trends and first-quarter results into account, the company has 13 medicines and a COVID-19 vaccine on track to be blockbuster products ($1 billion or more in annual sales) in 2023. J&J's portfolio includes its top-selling immunology therapy Stelara and its top-selling cancer treatment Darzalex, which are both poised to be mega-blockbusters ($5 billion-plus in sales) again this year.
Thanks to these products, analysts anticipate that the company will generate $99 billion in revenue in 2023. If its price-to-sales (P/S) ratio stays constant at around 4.5, J&J would need to generate $222 billion in 2038 revenue to reach a $1 trillion valuation. This would require a roughly 6% compound annual growth rate in its sales over the next 15 years -- a doable feat considering the company's drug pipeline.
Johnson & Johnson has several especially promising drugs that could soon hit the market. For one, its blood thinner co-owned with Bristol Myers Squibb (BMY 0.34%), milvexian, could haul in more than $2 billion in annual revenue for each company. Tremfya also has potential blockbuster indications in Phase 3 clinical trials for ulcerative colitis and Crohn's disease.
Looking beyond the near future, 70 of the 102 indications in its drug pipeline as of April 18 are in Phase 1 or Phase 2 clinical trials. This could help the company overcome competition from Tremfya biosimilars that could enter the market by 2025. That's why, at a minimum, I believe that J&J will come close to reaching its required sales growth rate to become a trillion-dollar company by 2038.
The stock is a buy for conservative investors
As J&J works toward reaching a $1 trillion valuation, shareholders can patiently collect generous starting income from the Dividend King in the meantime. The stock's 2.9% dividend yield is well above the S&P 500 index's 1.6% yield. And with the dividend payout ratio set to come in at just 44% in 2023, there is reason to believe that the income shareholders receive from J&J will increase over time.
J&J's forward price-to-earnings (P/E) ratio of 15.4 is moderately more than the drug manufacturers' industry average forward P/E ratio of 13.4. But when considering the company's status as an industry titan, this valuation premium is reasonable in my opinion.
