Warren Buffett is known for owning shares in some of America's leading companies, in industries from financials to oil. One particular area he hasn't invested too heavily in, though, is healthcare -- the risks of drug development, high costs of research, and complexity of the science behind many pharma pipelines are all elements that don't go hand-in-hand with the billionaire's investment strategy.
But there's one thing in particular that Buffett and his team at Berkshire Hathaway may have liked about Johnson & Johnson (JNJ -0.46%), their long-term -- and very last -- pharmaceutical holding. And that's the company's track record of dividend growth. Still, Buffett and his fund managers recently sold all of their shares of the pharma giant, marking a complete exit from the industry. Considering Buffett's top stock picking skills and long-term performance, you may be temped to sell or avoid J&J too. But should you really follow the Oracle of Omaha this time? Let's find out.
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Losing out on $1.5 million annually
First, it's important to note that Buffett surely appreciated J&J's dividend payments, but losing the $1.5 million annually they represent today won't make a huge impact on Berkshire's more than $300 billion portfolio. Buffett and his team may find there's more to gain by reallocating their investment into another stock or stocks in an industry they favor.
For most of us, as smaller investors, though, the potential dividends we might collect from J&J could make more of an impact on our daily lives -- offering us a chunk of money we can spend, save, or reinvest each year. So, J&J's dividend strength is something we should consider, as well as the company's commitment to growing this dividend.
As a Dividend King, the pharma giant has increased payments for more than 50 years, showing its focus on rewarding shareholders. It's unlikely J&J will stray from that policy after so many years, especially since its $15 billion in free cash flow means it has what it takes to support dividend growth.
So, it's clear that for investors seeking passive income, J&J could be a winning choice.
Now let's talk about the company's business itself. Buffett hasn't said why Berkshire closed out the J&J position -- or why the fund has exited the pharmaceutical industry. But as I mentioned above, certain elements we know about Buffett's investment strategy offer possible reasons. And here's the good news for J&J and its potential investors: These reasons aren't specific to J&J, but instead are simply part of the pharma and biotech businesses.
J&J's consumer health spinoff
And speaking of the pharma business, J&J recently made a transition that should lead to more growth moving forward. The company spun off its consumer health business, which had been weighing on earnings growth, and plans to focus all of its resources on its higher-growth pharmaceuticals and medtech businesses. The spinoff left J&J with more than $13 billion in proceeds, which it could pour into its pipeline or use to acquire a new program or company.
Of course, this makes J&J more dependent on the research and development spending that goes with drug and medical device development -- but even a small number of successes could lead to billion-dollar revenue down the road. So, the shift away from consumer health and toward these other areas looks like a wise decision.
It's also important to remember J&J has delivered a long track record of earnings growth, and in recent years, the pharmaceuticals and medtech businesses led this growth. Today, J&J shares are trading for about 15x forward earnings estimates, close to a three-year low by that measure.
Let's get back to our question: Should you follow Warren Buffett and sell or avoid J&J? This depends on your investment strategy. If you're a high-growth investor and you're not too interested in dividends, you'll find better opportunities elsewhere, possibly in the area of biotech if you're aiming for an investment in the healthcare industry.
But, if you're more of a cautious investor and you appreciate a good dividend, J&J may be just what the doctor ordered.
