One of the biggest risks facing Johnson & Johnson (JNJ 0.41%) in recent years has been its exposure to talc lawsuits. The uncertainty around that issue is a key reason why shares of Johnson & Johnson have declined by 9% in the past three years, with the legal cloud weighing heavily on the business.
While the company has set aside billions of dollars to account for lawsuits that allege talc-based products led to people developing cancer, Johnson & Johnson has failed to close out the matter completely. But J&J believes it's finally close to being able to do that.
NYSE: JNJ
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A new settlement may be approved soon
On Johnson & Johnson's earnings call earlier this month, management provided an update on the talc lawsuits. Chief Financial Officer Joseph Wolk says that claimants will be able to vote on the company's latest proposed settlement. Voting is taking place until July 26 and it will take a few weeks to tally everything up and determine the level of support for the plan.
Johnson & Johnson is committing to pay $8 billion over a period of 25 years, which equates to a present value of $6.5 billion today. It says the deal would address 99.75% of the outstanding talc lawsuits. The company says there is widespread approval, and it believes that it will obtain the 75% support it needs to move forward with the settlement plan. Additionally, Wolk states that the company has settled 95% of payments concerning mesothelioma claims.
Johnson & Johnson has previously made multiple attempts to try and settle these lawsuits through a bankruptcy involving a subsidiary, LTL Management. That has failed in the past. But what's different this time is that the company is allowing claimants to actually vote on the proposed settlement. And by garnering enough support from them, that could potentially make a third attempt at resolving the issue through bankruptcy successful.
Until it's 100% over, there's going to still be some significant risk here
Johnson & Johnson has already set a reserve of $11 billion to deal with the settlements, which means a lot of the financial cost is likely already accounted for and priced into the stock's current valuation.
There is always the potential, however, that a few lawsuits can saddle the company with significant damages. Thus far, those cases have been few and far between. One of the most troubling examples for J&J was a situation in which a Missouri court awarded $2.1 billion to 22 women who said they contracted ovarian cancer from using the company's talc products.
This is where settling more than 95% of cases can be encouraging and at the same time misleading. When you're talking about a situation that involves tens of thousands of claimants, that percentage may not necessarily be all that comforting or reassuring to investors, simply because a few particularly troubling cases with potential outsize compensation could be enough to lead to billions more in expenses that are not accounted for in the company's projections.
As close as Johnson & Johnson believes it may be to the finish line, until it's actually there, there's going to be some considerable uncertainty around its full financial costs related to these talc lawsuits.
Investors are better off avoiding Johnson & Johnson stock
Ongoing legal battles are unfortunately nothing new for Johnson & Johnson, and they present a risk for investors. The danger is with the company potentially spending billions on legal bills in a given year, it may not have as many resources as it needs to pursue growth opportunities or to put toward raising its dividend payments.
Until the talc issues are fully resolved and the matter is completely put to rest, investors are better off pursuing other dividend stocks for recurring income; Johnson & Johnson simply isn't worth the risk.
