What's the best way to win in your portfolio? Pick a few great stocks that provide you with exposure to high-growth and stable industries. Now what if, instead of needing several stocks to do this, you can do it with just one? I'd certainly call that the best type of blue chip out there.
But is there such a stock?
If you're someone who always thought blue chips meant dull, safe, and low-growth investments, you've got it wrong. Blue chips don't have to be dull or low-growth. Case in point: Johnson & Johnson
High performance
If you're looking for that one stock with high-returning potential that can still perform its role as a stable core investment, JNJ is the stock for you. With a line of brands ranging from the everyday (Band-Aid, Tylenol, Splenda) to the exotic (Risperdal, Eprex, Duragesic), Johnson & Johnson combines the speculative nature of big pharma with the stability of a consumer goods company. And it does that pretty darn well. Take a look:
|
FY End |
Total Reve-nue |
Opera-ting Income |
Net Income |
Dilu-ted EPS |
Divi-dends per share |
|---|---|---|---|---|---|
|
Dec. 30, 2001 |
32,317 |
7,885 |
5,668 |
1.84 |
0.7 |
|
Dec. 29, 2002 |
36,298 |
9,678 |
6,597 |
2.16 |
0.8 |
|
Dec. 28, 2003 |
41,862 |
10,966 |
7,197 |
2.40 |
0.93 |
|
Jan. 2, 2005 |
47,348 |
12,863 |
8,509 |
2.84 |
1.1 |
| Jan. 1, 2006 | 50,514 | 13,371 | 10,411 | 3.46 | 1.28 |
|
5-Yr. Average Annual Growth* |
11.86 |
14.32 |
16.52 |
17.22 |
16.29 |
This is a company that has not only grown its sales and earnings by double digits over the past five years, but has also grown its dividends by an average of 16.3% per year. That's a double win for shareholders.
And if you're worried this income-generating powerhouse isn't generating the cash, relax; it's also grown its free cash flow by 8.3% per year during this same time frame. In its most recent fiscal year, JNJ delivered free cash flow that was 89% of net income. That should put Foolish readers at ease.
A strong business position
So it's all well and good with the financials -- what about the business itself? Well, Johnson & Johnson, as a business, has a return on capital of more than 22%. That's higher than consumer products staples such as Procter & Gamble
The company's pharmaceutical unit generates 44% of its total sales, helped by sales of leading drugs such as Risperdal for schizophrenia and Procrit to stimulate red blood cell production. This is the riskiest part of JNJ's business, but it's spending more than $6 billion per year for research and development to improve its pipeline. JNJ's medical device segment contributes 37% to the top line, while consumer products come in at 18%.
In the medical device area, JNJ has gone after acquisitions that would stimulate growth -- it recently acquired Vascular Control Systems and Animas Corp. It has also shown its willingness to acquire other synergistic companies. In the consumer-products area, JNJ is acquiring Pfizer's consumer health care division, valued at $16.6 billion - an entity that earned $3.9 billion in sales in 2005.
Foolish bottom line
For investors who have held on to JNJ for the past decade, this has been a triple-bagger. And with the company expected to grow at least 10% annually over the next few years, its return potential won't abate anytime soon.
JNJ is currently ranked a four-star stock in the Motley Fool CAPS stock rating service. With the bulls outnumbering bears 29 to 1, the community is overwhelmingly in favor of Johnson & Johnson as a solid investment idea.
As TMFOrangeblood says:
Buy world-class consumer goods companies, reinvest the dividends, and then wait 30 years. Sounds boring, but that's a simplified version of Jeremy Siegel's advice for long-term wealth. JNJ is among the best of the best, and will anchor my portfolio for decades.
If you're out looking for the best blue chip money can buy, why not look for one that combines strong growth opportunities with stability? Johnson & Johnson is the best in this class. It's the ideal stock to build the core of your portfolio (and mine). Why pick anything else?
If you agree with me that JNJ will be the best blue chip of 2007, and I know you do, just go to CAPS and make your opinion known. Rate the stock as an outperform, and based on your votes, we'll declare the best blue chip for 2007 early next week! Click here to sign up for the free service.
To read about the rest of our blue-chip candidates, click here.
Fool sector head Shruti Basavaraj owns shares of Johnson & Johnson. She's also ranked 587 out of 12,358 in CAPS as of this writing. Johnson & Johnson is a Motley Fool Income Investor recommendation, while Pfizer is an Inside Value pick. The Fool has adisclosure policy.
