Founded in 1886, Johnson & Johnson (JNJ -0.46%) has been around for over a century and is one of the world's largest healthcare companies with a market cap of close to $450 billion. It's known for creating the first-ever first-aid kits and for the creation of Band-Aid. Over the years, it has developed many consumer brands, pharmaceuticals, and medical devices as it has continued to evolve and grow its business.
By 2003, this was already a formidable healthcare company, and I'll look at how much you would have made on a $25,000 investment back then.
20 years ago, the stock was trading at $50
On Aug. 1, 2003, shares of Johnson & Johnson closed at a price of $50.43. A $25,000 investment at the time would have allowed you to buy approximately 496 shares of the company. Today, with the stock price trading at around $170, the investment would now be worth more than $84,000, for a return of 237%. Over a 20-year period, that averages out to a compound annual growth rate of 6.3%.
But Johnson & Johnson is a proud Dividend King, having raised its payouts for 61 consecutive years, and so its payout has played a big part in its overall performance as an investment. And when including the dividend, a $25,000 investment from 2003 would now be worth more than $147,000. If you had invested in the S&P 500 instead, then your investment would be worth roughly $172,000.
While you would certainly have been better off going with the S&P during that stretch, Johnson & Johnson may be more suited for risk-averse investors who are willing to sacrifice some potential returns in exchange for long-term stability.
Where the business is today
Johnson & Johnson has recently spun off its consumer health business into newly formed Kenvue. That means it will be less diverse in the future, losing top brands such as Tylenol, Neutrogena, Listerine, and other well-known consumer products. But by doing so, it can focus on areas of its business that may be more appealing to growth investors and may offer better returns in the long run: pharmaceuticals and medical devices.
The problem with the company, however, is that it faces a fair amount of legal risk. From talc products to opioids and other pharmaceuticals, the company has spent billions over the years on legal expenses and paying out settlements. Most recently, a court awarded $18.8 million to a California cancer patient who claims the company's talc-based products led to his mesothelioma.
Johnson & Johnson is appealing the decision, but it's just one example of tens of thousands of lawsuits related to talc that remain unresolved. The company has proposed a settlement that could potentially address all the talc lawsuits and which would involve Johnson & Johnson paying out $8.9 billion (the present value of the payments). While it's a big price tag, it would help cap its total liability. A bankruptcy court still needs to approve the settlement.
Johnson & Johnson has vast resources, however, generating free cash flow of over $15 billion in each of the past four years, so it's in a good position to be able to handle lawsuits and other headwinds that may come its way.
Is the stock a good buy now?
Today, as the company pivots more toward growth, Johnson & Johnson may be a more appealing option for long-term investors. It's not a stock I would invest in, however, as legal challenges seem to never be too far away from the business. Plus, the company doesn't have big growth catalysts coming up to suggest that its returns will be far stronger in the future and that the stock can outperform the S&P.
It can make for a good dividend stock to own, but beyond that, there isn't an overwhelming reason to pick Johnson & Johnson over other healthcare stocks that may offer more potential growth in the long run.
