Healthcare conglomerate Johnson & Johnson (JNJ -1.52%) isn't flashy. Frankly, it's a boring stock that chugs along over the years. But that doesn't make it a boring investment. Share prices of J&J stock are up more than 13,000% over the past five decades on price alone. That becomes a total return of more than 41,000% had you reinvested your dividends along the way.
The company has gone through some big changes over the past year. It spun off its consumer products segment as Kenvue (KVUE -1.26%). It proposed a multibillion-dollar settlement for tens of thousands of its litigation cases surrounding allegations of health concerns over its talcum-based baby powder.
So is this stock set to resume its wealth-compounding trajectory moving forward?
What does Johnson & Johnson look like moving forward?
The part of Johnson & Johnson that became Kenvue is probably the part most consumers recognize. Kenvue is Johnson & Johnson's consumer segment that contains many household over-the-counter product brands, including Band-Aid, Tylenol, Aveeno, Listerine, and more. Now that Kenvue's initial public offering is complete, Johnson & Johnson still owns roughly 90% of Kenvue's shares, which will eventually get distributed to shareholders. So, what's left of Johnson & Johnson?
Johnson & Johnson will be a two-pronged company focusing on medical devices and pharmaceutical products, which were the company's two largest segments prior to the spinoff. The medical devices business has a strong footprint in end markets like orthopedics, surgery, cardiovascular and neurovascular intervention, and vision care. Meanwhile, the pharmaceutical business is diversified across many disciplines, including immunology, cardiovascular, oncology, infectious diseases, and vaccines.
Importantly, these businesses are growing at healthy rates. In the first quarter of this year, the medtech segment grew revenue by 11% (in constant currency) year over year, and the pharmaceutical segment grew by 7.2%. Johnson & Johnson is a diversified company that sells its products worldwide. Analysts believe the business will ultimately grow revenue at a low- to mid-single-digit annual rate for the foreseeable future, which is mostly what it's been doing already. In other words, not much has changed for the company between then and now.
Does a multibillion-dollar settlement threaten J&J's dividend?
The talcum powder litigation has hung over the company and its shareholders for some time. However, the recent announcement that Johnson & Johnson has proposed a whopping $8.9 billion settlement to settle tens of thousands of litigation cases gives shareholders some indication of what to expect.
Importantly, the settlement would be paid over the span of 25 years, so that's an annual expense of $356 million. That won't derail Johnson & Johnson's financials, which include more than $16 billion in free cash flow. The dividend has been raised for 61 consecutive years, and investors can reasonably expect that management will defend that streak.
JNJ Cash Dividend Payout Ratio data by YCharts
The litigation has reportedly already cost the company billions of dollars, so one might suspect that settling the talcum suits will give shareholders some certainty and let Johnson & Johnson's financials begin healing, too. The dividend payout ratio has increased in recent years, so that's worth monitoring moving forward.
However, Johnson & Johnson has a fortress-like balance sheet that should help the company overcome any turbulence. It holds a AAA corporate credit rating, one of just two companies with that rating, which is higher than the United States government. Investors shouldn't dismiss the litigation, but the dividend is likely intact moving forward and should ultimately become a blip over the coming decades.
Is Johnson & Johnson stock a buy today?
The stock has come alive since the proposed settlement was announced, but shares still remain closer to 52-week lows than not. Does that make Johnson & Johnson a buy? Analysts believe the company will earn approximately $10.66 per share in 2023, which values the stock at a price-to-earnings ratio (P/E) of 15.
This is a discount to the broader market; the S&P 500 trades at a P/E of 20. However, the broader market historically grows at a 10% annual rate, and analysts are looking for earnings-per-share (EPS) growth averaging around 6% from Johnson & Johnson. When you factor in the company's stellar balance sheet, nearly 3% dividend yield, and long performance history, I would argue that shares are fairly valued at their current price.
That might not entice you to back up the truck on Johnson & Johnson, but it's hard to go wrong nibbling at blue chip stocks when they're fairly valued.
