Large-cap pharmaceuticals stocks that pay dividends frequently generate market-beating returns over the long term. The core reason is that these companies tend to sport healthy profit margins, sizable free cash flows, and modest competitive moats. Not all big pharma stocks are market slayers, however. For instance, healthcare behemoth Johnson & Johnson (JNJ -0.46%) hasn't outperformed the broader markets in six years.
JNJ Total Return Level data by YCharts
However, J&J has been making moves in an attempt to return to its market-beating ways. The company recently carved out its consumer healthcare unit into a stand-alone business called Kenvue, and it has spent enormous sums on business development through large acquisitions such as Actelion and Abiomed in recent years. J&J also launched several potential blockbuster drugs over the last 12 months.
Image source: Getty Images.
Is it time to buy this laggard?
J&J's value proposition
As an investing vehicle, J&J stock has a lot to offer. The company belongs to a remarkable group of equities known as Dividend Kings, signifying that it has raised its dividend for at least 50 consecutive years. Additionally, J&J's annualized yield of 2.88% tops the average among S&P 500 stocks (current average of 1.66%). The company's dividend is also well covered by earnings. In 2022, J&J paid out $11.7 billion in dividends to shareholders on $17.9 billion in total net earnings.
What's more, J&J's stock sports an attractive valuation. With a projected earnings multiple of roughly 15, the company's shares are undervalued relative to its big pharma peers (average forward-looking price-to-earnings ratio of 20.2). Plus, the company's forward-looking earnings yield of 6.7% implies that its shares are undervalued relative to a risk-free asset such as the 10-year U.S. Treasury note. Bottom line: J&J stock screens as a bargain right now.
The company's pharma pipeline has long been the standard of innovation in the industry, thanks to its heavy investment in research and development. That being said, J&J's late-stage pharma pipeline has grown uncharacteristically thin of late. As a result, the company will probably be an active player on the merger and acquisition scene later this year or in early 2024.
On a positive note, J&J is set to face considerably fewer major patent expires this decade than most of its big pharma peers. Hence, its lineup of newer growth products, such as the front-line multiple myeloma treatment Darzalex and the non-small cell lung cancer drug Rybrevant, should be able to drive respectable levels of top-line growth in the years ahead.
Time to buy?
If you're looking for a reasonably valued income stock with decent growth prospects, J&J should definitely be on your radar. Although the healthcare giant's shares have slumped relative to the broader markets over the past several years, the company's reorganization around medtech and branded pharma products should be major catalysts for its stock price. And additional business development in areas of high unmet medical need could fuel even more top-line growth over the balance of the decade. Therefore, savvy investors may want to take advantage of the company's attractive valuation soon.
