Shares of Johnson & Johnson (NYSE: JNJ) hit a 52-week high on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
In "The Tortoise and the Hare," we learn that slow but steady wins the race. That is essentially the Johnson & Johnson story in a nutshell.

J&J is made up of three main segments: consumer products, pharmaceuticals, and medical devices/diagnostics. If you'll notice, all three segments have pretty inelastic pricing and some even border on necessity items. Simply put, that means J&J is positioned to succeed regardless of how well or poorly the economy is behaving.

The primary growth driver pushing J&J higher in recent weeks is the closing of its $19.7 billion purchase of medical device maker Synthes. Investors had previously been concerned with how J&J planned to fund the buyout, but it quickly dispelled those fears by announcing plans to utilize cash on hand by repurchasing shares at its subsidiary Janssen Pharmaceuticals to fund the deal. The deal is expected to be immediately accretive to full-year 2012 earnings by $0.03 to $0.05.

J&J's new drugs and its existing drug partnerships are also playing a large part in its success. Prostate cancer drug Zytiga has blockbuster potential, while Remicade, a treatment for rheumatoid arthritis and Crohn's disease that is co-licensed in various parts of the world with Merck (NYSE: MRK), continues to grow by double-digits.

Of course, even a powerhouse like J&J comes with risks. Levaquin was a billion-dollar drug, but losing patent protection and opening the drug up to generic competition has drastically eaten away at its sales potential. Also, an earnings warning from Procter & Gamble (NYSE: PG) in the consumer products segment is sure to remind J&J investors of the risk of rising material costs and a spending slowdown in Europe.

How it stacks up
Let's see how Johnson & Johnson stacks up next to its peers.

JNJ Chart

JNJ data by YCharts.

Here you can see J&J's greatest attribute: stability. With a tighter trading range than Eli Lilly (NYSE: LLY), Merck, and even Novartis (NYSE: NVS), its shareholders often sleep easy at night.



Price/Cash Flow

Forward P/E

Dividend Yield

Johnson & Johnson 3.1 13.1 12.5 3.6%
Novartis 2.2 9.2 11.1 4.5%
Merck 2.4 10.6 11.5 3.9%
Eli Lilly 3.4 7.0 10.8 4.5%

Source: Morningstar. Yields are projected.

You might be tempted to look at these figures and say that J&J is fairly valued or perhaps even overvalued relative to its peers, but it's not that simple.

J&J's consumer products segment and medical device segment shield it from a lot of the volatility that traditional drug makers like Eli Lilly encounter. Eli Lilly, for example, has almost three-quarters of its revenue stream at risk of generic competition between 2010 and 2017. That built-in risk is the primary reason Lilly trades at a cash flow discount to its peers.

Merck and Novartis, on the other hand, have generally escaped the patent cliff. Novartis is set to lose patent protection for its blockbuster Diovan in September while Merck is also preparing to lose patent exclusivity on Singulair later this year. Both drugs account for around 10% of annual sales, respectively, for each company. However, beyond these individual drugs, their pipelines appear healthy. Novartis also has a generic drug subsidiary in Sandoz that provides consistent pipeline expansion.

What's next
Now for the $64,000 question: What's next for Johnson & Johnson? The answer depends on how well it can fend of inflationary costs, if it can continue to forge earnings-accretive partnerships and deals, and if it will extend its 50-year streak of dividend increases.

Our very own CAPS community gives the company a highly coveted five-star rating, with 96.5% of members expecting it to outperform. You can count me among the 13,500-plus members who have made a CAPScall of outperform on J&J. I'm currently up about one point on that selection.

J&J is a very difficult company to bet against. It offers one of the longest streaks for dividend increases in the market. Its 3.6% yield would offer a complete payback in 20 years or less depending on whether or not you reinvested the dividends. Its well-balanced drug, device, and consumer product lines offer stability in any economic environment. For lack of a better word, it is possibly one of the best representations of the buy-and-hold ethos. For that reason alone, I see no reason why J&J can't head even higher.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.