Johnson & Johnson (JNJ -1.52%) is one of the most recognized healthcare companies around. That's thanks to products like its Band-Aid bandages and Tylenol -- staples in many medicine cabinets.
J&J also has pharmaceutical and medtech units. And together, these three businesses have helped the company bring in billions of dollars in annual earnings.
The company also is among the biggest drugmakers by market value. All of this means investors may feel comfortable adding shares of J&J to their portfolios.
But should you really add shares of this healthcare giant to your holdings now? Before you make a move, check out these two reasons to buy and one reason to sell.
Reason to buy: Consumer health spinoff
Right now, J&J is in the middle of an important transformation. It's spinning off its consumer health business into a separate entity called Kenvue.
Why would J&J want to spin off the unit that sells its most well-known products? Well, it's true that Band-Aid bandages and other products, as mentioned above, have made J&J a household name. But this unit hasn't brought in much growth in recent times.
Last year, J&J's consumer health revenue rose less than 4%. That's when the pharma and medtech units posted growth of more than 6%. Consumer health also contributed much less to earnings, at only about $14 billion. Pharma and medtech brought in more than $52 billion and $27 billion, respectively.
The spinoff is a good idea for two reasons. First, it means consumer health no longer will hold back overall revenue growth. And second, J&J can devote all of its resources to further strengthening its two strongest businesses -- by developing new products or growing through acquisitions. For instance, last year J&J bought heart pump specialist Abiomed, adding another billion-dollar platform to its medtech portfolio.
Thanks to the spinoff, J&J may enter a new phase of growth.
Reason to buy: Dividend growth
J&J is part of the elite list of companies known as Dividend Kings. These are companies that have raised their dividends for at least the past 50 years. In the case of J&J, we're talking 61 years.
This shows that sharing successes with shareholders is important to the company. So it's unlikely J&J will change its policy.
The healthcare giant pays an annual dividend of $4.76 per share, representing a dividend yield of 2.88%. This is higher than the average yield for drugmakers, according to research from the NYU Stern School of Business.
J&J's free cash flow (FCF) has declined in recent times. But with more than $16 billion in FCF, the company clearly has a strong enough level of FCF to ensure payments and increases down the road.
JNJ Free Cash Flow data by YCharts.
If you buy shares of J&J, you'll benefit from annual passive income -- no matter what the market is doing. Dividend stocks you can count on are great to own in tough markets because they guarantee some income, even if your portfolio is down. And in better times, you'll still appreciate this extra revenue, earned by simply holding onto the shares.
Reason to sell: Lackluster share performance
Over the past 10 years, J&J shares have climbed 88%. That's positive -- if we don't consider the performance of the S&P 500. If we look at the benchmark index, though, J&J's picture doesn't look so bright. That's because the S&P 500 has outperformed the healthcare giant over that time period. The S&P 500 also has outperformed J&J over the past five years.
At the same time, a few elements could explain J&J's underperformance. The company has faced thousands of lawsuits linked to its talc products. And as I discussed above, a lack of growth in the consumer health business weighed on earnings, too. So investors may not have been overly eager to invest in J&J in recent times.
And if investors decide to focus on J&J's share price performance track record, they may avoid the stock -- and that would result in more weakness ahead. Meanwhile, some investors in a rallying market might opt to invest in stocks with momentum. And that also could hurt J&J's performance.
Should you buy or sell?
Indeed, J&J's share performance hasn't been anything to write home about over the past several years. But things could be about to change.
The consumer health spinoff represents a key turning point for the healthcare powerhouse. As mentioned above, it's likely to boost revenue growth. And that should lift earnings -- and eventually, the share price.
At the same time, a big source of trouble for J&J -- the talc lawsuits -- could be almost over. The company recently proposed an $8.9 billion settlement.
J&J may not take off immediately. And it probably won't soar like a young biotech company launching its first product. But J&J could climb over time, thanks to some of the transitions happening now. Add to that a growing dividend.
That equals a solid stock to include in any healthcare portfolio. So despite J&J's lackluster past performance, I'm willing to give it another chance. And that's why the reasons to buy outweigh the one reason to sell the stock.
