At any other time in history, wondering whether Johnson & Johnson (NYSE: JNJ) was currently a buy would be a rhetorical question; the only question was how loudly you wanted to say "yes." Over the years, there were better times to buy than others, but even if you invested at a near-term peak price, you'd still have beaten the S&P 500.

Date

Johnson & Johnson
Return

S&P 500
Return

3/27/2002

11.9%

7.1%

11/22/1999

42.6%

(11.4%)

1/8/1992

491.1%

472.6%

Source: Capital IQ and Robert Shiller. Returns include dividends.

A growing dividend helped those returns substantially, and the stock price grew because the company was able to leverage its size and boost earnings faster than revenue. But it's that large size that may also be the company's downfall.

Companies within a company
Like Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Johnson & Johnson provides a lot of autonomy to its individual companies. It's worked for Buffett and Johnson & Johnson, because the leaders of the individual businesses take pride of ownership. Taking orders from above would stifle innovation.

But the autonomy may have allowed Johnson & Johnson to lower its guard a little. Quality-control issues at McNeil Consumer Healthcare have caused multiple recalls over the last year -- most recently because the concentration of medicine in children's drugs might have been too high. And the company's Advanced Sterilization Products subsidiary recently got a warning letter from the Food and Drug Administration for failing to ensure that corrective changes actually worked.

Break up Johnson & Johnson?
I wouldn't go that far. And besides, how would we tell each of the baby-Johnsons apart?

Tyco's (NYSE: TYC) decision to spin off its health-care division, Covidien (NYSE: COV), made sense. But Johnson & Johnson is already an all-health-care company. I'm sure upper management knows what it needs to do to maintain quality. The key is to make those changes as quickly as possible while maintaining as much of the autonomy that's gotten Johnson & Johnson this far.

Get your cues from Washington
This Thursday, Johnson & Johnson executives will appear before the House Committee on Oversight and Government Reform. The proceedings, which will also include Food and Drug Administration deputy commissioner Josh Sharfstein, are sure to be high drama with demands for answers about how this could happen. Investors can probably ignore 90% it.

It doesn't matter how it happened; snafus are part of investing: Genzyme's (Nasdaq: GENZ) plant got infected, Boston Scientific (NYSE: BSX) failed to turn in paperwork to the FDA, Sequenom's data turned out to be compromised. There's not much investors could have done to see any of those coming.

Instead, investors should listen for the way Johnson & Johnson plans to fix the problem and make sure it doesn't happen again. For Johnson & Johnson, taking corrective action across the subsidiaries, in areas where we and the FDA may not even know there's a problem, is especially important. A problem at a subsidiary or two won't hurt earnings that much, but investors need to know that this won't be an ongoing or spreading problem.

Be brave, but not stupid
Johnson & Johnson is a well-run company with a culture that's been building for over a century. It seems likely that the company will be able to fix its problems and bounce back just fine -- remember the tampered Tylenol problem in the 1980s? The solution may not happen quickly, but Johnson & Johnson has and always will be a long-term investment.

Still, that doesn't give you a license to go all in on Johnson & Johnson, either. The company's risk is hard to quantify. If you're going to buy, a measured approach of buying in stages may be the best move.