If size were a guarantee of performance, Johnson & Johnson (JNJ -0.46%) would be one of the best healthcare stocks to buy, being one of the largest by market cap in the sector. But things aren't that simple, and in fact, the company recently decided to slim down by spinning off its consumer health segment, which was home to several famous over-the-counter healthcare brands. The new J&J still has many qualities that made it successful, but is it worth investing in the drugmaker? Let's find out.
The benefits of the consumer health split
J&J completed the spinoff of its consumer health division earlier this year. The new company, called Kenvue, started trading on the NYSE on May 4. While this segment added considerable diversity to J&J's overall business, there were drawbacks, too. First and most significant, the company's consumer health unit was holding down revenue growth.
J&J's remaining segments, medical device and technology and pharmaceuticals, typically increase sales faster. Second, larger businesses tend to be harder to manage. Companies often end up spreading their resources thin. While that may not be too big a problem if every segment is performing optimally, in this case, J&J decided that increasing its focus on its higher-growth divisions would be better for the company and its shareholders.
So a key benefit of this transaction should be stronger top-line growth and a smaller, more focused business.
The rest of the company is solid
J&J's operations are still somewhat diversified despite spinning off its consumer health unit. First, there is the company's pharmaceutical division. Many drugmakers focus most of their efforts on a single therapeutic area. Vertex Pharmaceutical is the authority when it comes to medicines that treat the underlying causes of cystic fibrosis. Similarly, Gilead Sciences is largely an HIV treatment company, while Novo Nordisk is known for its leadership in diabetes and obesity therapies.
J&J's greatest expertise lies in oncology and immunology -- the two largest and fastest-growing areas in the industry -- but its lineup also features plenty of drugs in other niches. In the first quarter, the company's pharmaceutical unit reported total sales of $13.4 billion, an increase of 4.2% year over year. J&J's immunology and oncology sales were both $4.1 billion, although the former saw its top line decrease by 0.2% year over year, while the latter's sales rose by 4.1%.
J&J also has a hand in neuroscience, infectious diseases, pulmonary hypertension, etc. Then, there is its med-tech operation, where it develops and markets a range of products within several units, including vision, orthopedics, surgery, and interventional solutions. None of them accounted for more than 33% of J&J's total med-tech revenue of $7.5 billion in the first quarter, which marked a 7.3% year over year increase.
J&J will continue to spend plenty of research and development money that will lead to more innovations, a deeper lineup of products, and stronger revenue, profits, and cash flow.
An excellent dividend growth stock
J&J's impressive dividend history adds to its appeal. The company has accomplished the rare feat of increasing its payouts for 61 consecutive years, which makes it a Dividend King. That, in itself, is a testament to the strength of its underlying business. Only corporations that generate excellent financial results consistently can pull off something like that.
The stock currently offers a yield of 2.9%, which is still above the S&P 500's average of about 1.6%, although not supremely high. The dividend also is about as safe as they come.
A solid pick for long-term investors
J&J isn't without risks; no company is. One of its most important threats comes from its legal issues. It has dealt with thousands of lawsuits related to its talc-based products that allegedly gave consumers cancer. But even so, the company has moved closer to resolving this problem. At any rate, J&J's robust operations, innovative abilities, and the fact that the healthcare industry will only grow as the world's population ages all make the company an excellent stock to buy and hold.
