My Foolish colleague Brian Lawler lays out an excellent bearish case on Johnson & Johnson
Simply put, J&J has proved itself to be a world-class business that knows how to manage its various operations and generate ample amounts of cash flow from them. Now, as you point out, there is definitely risk inherent in its sector -- after all, we are talking about the development of drugs and medical devices. Pipelines will have failures -- no doubt about it. But that's part of the allure of this sector. Baby boomers need health options as they age -- knowing how important the health-care industry will be as time goes on, is the risk of finding blockbuster medical solutions really that frightening? I don't think so. Plus, this isn't as risky as, say, a small-cap biotech entity.
Sales growth should always be a concern, but you, Brian, are being too pessimistic. J&J brings in a lot of money, and its sales will grow down the line. You even intimated that the dividend is decent -- but you then went on to bring up something about certificates of deposit. There's no comparison here -- given the potential for capital appreciation and effective yield down the road from dividend increases, J&J beats a CD. In terms of earnings growth, I'd respectfully suggest that you focus on the free cash flow -- yes, it's been perhaps sluggish, but it covers the capital costs and dividends, and that's what's vital for shareholder value. This will be especially true if the economy slows dramatically in the near future and investors need to play defense.
J&J will do well down the line, my Foolish friend. Yes, there are all kinds of options out there, like GlaxoSmithKline
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Johnson & Johnson and GlaxoSmithKline are current picks of the Motley Fool Income Investor newsletter service. Merck is a former Income Investor pick. Pfizer is a recommendation of Motley Fool Inside Value. Try out any of our investing newsletters free for 30 days .
Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 911 out of 13,660 investors in the Motley Fool CAPS community. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.