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Why Isn’t Johnson & Johnson Making More Acquisitions?

By Motley Fool Staff - Feb 5, 2016 at 9:01AM

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The healthcare giant has plenty of cash on hand, but it's clearly waiting for the right opportunity to spend it.

A massive and uncharacteristically high cash stockpile has Johnson & Johnson's (JNJ -2.23%) management discussing how best to spend its money. In this installment of Industry Focus: Healthcare, Motley Fool healthcare contributor Todd Campbell and analyst Kristine Harjes talk about what Johnson & Johnson's C-suite is considering in the mergers and acquisitions sphere, and what types of deals the company could consider.

A full transcript follows the video.


This podcast was recorded on Jan. 27, 2016.

Kristine Harjes: We've been thinking about Johnson & Johnson's merger and acquisition, M&A activity, for a long time, because as you mentioned, they're sitting on this inflated balance sheet. They've got $18.5 billion in net cash, which means $38.5 billion in cash and marketable securities, and $20 billion of debt. They didn't act in 2015, citing that everything is too over-valued. But clearly, companies have gotten a lot cheaper at this point.

Todd Campbell: Yeah. They're going to be selective, though. If you listen to the conference call, and I advise you to. I think every investor should try to tune in to the conference call. At least, read the transcript, scroll through it. CFO Caruso had a couple interesting things to say on that conference call about this cash stockpile. One of the things he said was, it's a higher level of cash than they typically hold. But he also went on to say that they're going to act, they will act, but they'll only act when they see the right value in the right deal at the right price with the right partner.

So, there's a lot of caveats that are going to be associated with any deals they do. And you and I talked last week or the week before about how J&J has indicated that I have a preference toward smaller bolt-on acquisitions. That's probably where they're likely to focus, especially if they can get teams that fit that mantra, if you will. The right price, the right people.

Harjes: Yeah. And I'll quote Alex Gorsky, the CEO, here: "Smaller tuck-ins are frankly more straightforward to get done." So, that's showing your hand right there. Although, immediately after he says that, he does kind of pivot to say that, "You know, we do consider bigger acquisitions ... " But it seemed to be mostly in the consumer segment that they would even think about it.

Campbell: Yeah. I think investors are going to see that there's going to be money that's going to be spent, but I wouldn't expect any deals that are going to be at such a size where it's going to impede their ability to continue to send money back to shareholders through buybacks, which have been a very important part of the company's capital spending plans, and also dividends, which, Johnson & Johnson is one of the best dividend-paying stocks in existence today.

Harjes: Absolutely. It's a 3.1% dividend, a company with a really strong history of paying such a dividend. I don't know about you, Todd, but I'm definitely personally bullish on Johnson & Johnson. Probably a good time to remind people that we might have interests in the stocks we talk about on the show, and the Motley Fool could have formal recommendations for or against them; don't to buy or sell based solely on what you hear, go read that conference call transcript. But just to wrap up, this is the closing of the 2015 books for J&J. How are you feeling about the company? Thumbs up? Thumbs down?

Campbell: I'm going to give it a thumbs up. Obviously, they've got to figure out how to replace the revenue that's going to be lost from Remicade, but they've got some really interesting drugs that are coming through the pipeline. They've got 70 products in novel drugs that they're studying in early stages of development. They've got a recent filing that they've done for Invokana plus Metformin combination therapy that could be a big seller. They recently got a new drug on the market for multiple myeloma. I'm going to give it a thumbs up. I think this is a company that investors can continue to stash away for the next decade, forget just one year.

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