Johnson & Johnson (JNJ 0.50%) is a company that may look a lot different over the next several years. Top-selling drug Stelara is facing a patent cliff this year, the company has just spun off one of its business units, and there's no certainty that its legal issues will go away, either.
Here's a look at some of the opportunities and risks for the business, and whether it's a good time to add shares of Johnson & Johnson to your portfolio.
Could it become a hot growth stock?
One of the big drawbacks with Johnson & Johnson has been that over the years, while it has been a safe buy, it hasn't generated much growth. Even with a diverse business that included consumer health, pharmaceuticals, and medical devices, its growth rate has been uninspiring, as seen in the chart.
JNJ Revenue (Annual) data by YCharts
Now that the company has spun off consumer health, the business has freed up resources to potentially be more aggressive in pursuing growth opportunities. In 2020, J&J acquired Momenta Pharmaceuticals for $6.5 billion. Last year, it bought heart pump maker Abiomed for a more sizable $16.6 billion price tag. It wouldn't be surprising to see more of these types of acquisitions over the next five years as the company looks to expand and diversify its operations.
Johnson & Johnson previously projected that even without mergers and acquisitions, its pharma business could get to $60 billion in sales by 2025, and that's with factoring a loss of exclusivity in top-selling product Stelara. Last year, Johnson & Johnson reported $52.6 billion in revenue from its pharmaceutical segment.
If the company is able to resolve its talc lawsuits -- which it may be successful in doing as its recent offer appeared to be well-received by plaintiffs' lawyers -- then Johnson & Johnson may be in better shape to pursue acquisitions, knowing that its need to keep money aside for litigation costs won't be as high.
Those lawsuits are the biggest risk facing the company, and if Johnson & Johnson can put them to rest, there is the potential for the business to be more aggressive with respect to acquisitions. That could lead to a much better growth rate in the future at Johnson & Johnson.
NYSE: JNJ
Key Data Points
Can the dividend keep growing?
It seems like a forgone conclusion that Johnson & Johnson will continue growing its dividend as it has done for 61 consecutive years. It's hard to imagine that the company would break that streak. If a pandemic hasn't derailed it or multiple recessions over the years, it's difficult to imagine what could do so now.
The only risk really goes back to talc lawsuits. If the costs and legal obligations got out of control to the point they threatened the business, the dividend could be a necessary casualty. But that would be under a really bleak outlook.
In all likelihood, Johnson & Johnson keeps its streak going. The only question may be the rate of the increases. After all, the company can hike its dividend by just $0.01 to keep the streak going.
Johnson & Johnson's latest dividend hike was 5.3%, which is lower than the 6.6% it boosted its payout by a year earlier. If the company does focus more on growth, dividend hikes could be more modest in the future.
Is Johnson & Johnson stock a buy today?
Johnson & Johnson is generally a safe income investment to own for the long haul. If safety and dividends are your priorities, it's practically a no-brainer stock to buy, especially since it's not far from its 52-week low.
If your focus is on growth, however, there are probably faster-growing stocks to invest in. Over the past 10 years, even with its dividend, Johnson & Johnson's total return of 147% sharply trailed the S&P 500's 227% gain. And that's not a trend I see changing over the next five years.
While Johnson & Johnson will likely acquire more companies, it has yet to demonstrate that it is going to go for mammoth, business-changing acquisitions. That's what would likely be necessary for this to be a much more serious investment option for growth investors.
At its core, Johnson & Johnson has been a safe-haven stock, and investors need to know that they'll likely sacrifice some gains from this investment in return for long-term stability. If you're OK with that, this can make for a good healthcare stock to buy and hold.
