We all know Johnson & Johnson (JNJ -0.46%) thanks to top consumer products like Band-Aid bandages and the company's script logo. But times are changing. J&J recently spun off its consumer health business into a separate entity called Kenvue, and the healthcare giant is even changing its famous logo -- red printed letters will replace the cursive.
Meanwhile, J&J's share price doesn't reflect the idea of these exciting new times. The shares have slipped about 9% this year, missing out on the stock market rally. I wouldn't consider this a reflection of the company's potential though. As we head toward a new bull market, investors have favored growth stocks over steady and safe industries like healthcare, which tend to outperform in more difficult market environments. But before you turn your back on J&J, let's consider three points that smart investors know about the company.
1. J&J's about to enter a new phase of growth
J&J's consumer health business brought in about $14 billion in revenue last year, so you may be wondering why spinning this unit off is a good idea. It's important to consider the unit as part of the bigger picture. J&J's other units -- pharmaceuticals and medtech -- brought in $52 billion and $27 billion, respectively. These businesses also grew revenue more than 6% last year, while consumer health increased revenue 3.9%.
So, consumer health dragged down the company's overall revenue growth. And this isn't new. Over the past few years, consumer health's growth has lagged behind pharmaceuticals, as you can see in the chart below. (I excluded medtech from the chart since the postponement of surgical procedures due to COVID-19 weighed on that business at certain points during this time period.)
| Business Unit | 2019 Annual Revenue Growth | 2020 Annual Revenue Growth | 2021 Annual Revenue Growth | 2022 Annual Revenue Growth |
|---|---|---|---|---|
| Consumer health | 1.4% | 3.1% | 3.8% | 3.9% |
| Pharmaceuticals | 5.8% | 8.4% | 13.6% | 6.8% |
All of this means, without consumer health, J&J should be on the path to delivering greater revenue growth. But that's not all. J&J now can focus all of its resources on these two higher growth businesses, offering the company a better chance of bringing more pharma and medtech products -- the biggest revenue drivers -- to market.
2. J&J could win through M&A
J&J's appetite for mergers and acquisitions (M&A) is "voracious," Chief Financial Officer Joe Wolk said during the most recent earnings call. And the company has the financial situation to support that sort of appetite after bringing in more than $13 billion in cash proceeds from the Kenvue operation. This could help J&J expand its revenue opportunities through an acquisition or through the purchase of key assets from another company.
The healthcare powerhouse has a solid track record of M&A, with about half of its pipeline coming from external innovation. This spring, the company bought the rights to candidates for blood cancer from Cellular Biomedicine Group, boosting J&J's position in the growing area of cell therapy.
J&J late last year acquired Abiomed, a heart pump specialist that had generated 18 years of profitability and growth. The purchase already has started to deliver for J&J, with 20% revenue growth for the Abiomed business in the most recent quarter. Positive clinical trial results should help expand the use of Abiomed products, and J&J sees heart recovery as a big growth platform moving forward.
3. You can count on J&J to pay you while you sleep
Finally, J&J can be a very profitable investment for you no matter what the market is doing. That's because the company has made a true commitment to paying dividends. As a Dividend King, it's lifted payments for more than 50 straight years. This is key because it shows dividend growth is important to J&J, so it's reasonable to expect the company to continue to increase payments.
J&J paid out about 67% of its free cash flow in dividends over the past year.
JNJ Free Cash Flow data by YCharts.
And though free cash flow is lower than it was a couple of years ago, it still remains strong -- and has increased over time. All of this means J&J has what it takes to continue rewarding shareholders this way.
J&J pays a dividend of $4.76 per share, representing a dividend yield of 2.97% -- and that surpasses the yield of the S&P 500. So, if you hold shares of J&J, you truly can make money during any market environment while you sit back in an armchair and sleep.
