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20 Reasons to Buy Johnson & Johnson and Never Sell

By Sean Williams - Apr 12, 2016 at 8:24AM

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Johnson & Johnson has consistently outperformed the S&P 500 over the long run. Here's a taste of why shareholders buy this stock and never let go.

Johnson & Johnson CEO Alex Gorsky. Image source: Johnson & Johnson. 

For investors, 2016 has been unique. It featured the worst start to a new year in recorded history, and it also featured the most voracious quarterly comeback for U.S. indexes in decades.

But, if there's been one constant, it's that megacap healthcare conglomerate Johnson & Johnson (JNJ 0.42%) has been steady as a rock for investors. With the exception of two trading days at the beginning of January, Johnson & Johnson has outperformed the broad-based S&P 500 all year long. The same is true (i.e., J&J outperforming the S&P 500) over a five-year, 10-year, and 45-year period. What makes Johnson & Johnson so great is that it doesn't just have a single growth driver. Instead, it has a long list of reasons why investors of all ages are buying shares of J&J and never letting go.

Here are 20 reasons you might consider joining this successful buy-and-hold crowd and never selling Johnson & Johnson.

1. 130 years: Johnson & Johnson has been around for 130 years and sports a current $300 billion valuation. Its history and valuation demonstrate that it has staying power, meaning you can sleep easy at night knowing that it'll be there in the morning when you wake up.

2. 265-plus subsidiaries: J&J isn't just one company, or even three business segments. It's comprised of more than 265 subsidiaries, which makes divesting slower-growth or non-core assets easy. It also allows for J&J to hedge its growth against U.S. and global recessions.

3. 60-plus countries: In addition to being composed of many companies, J&J operates in more than 60 countries worldwide. The idea here is that J&J can take advantage of high-margin opportunities in developed countries, while also solidifying a long-tail opportunity in developing and emerging markets.

4. Nine CEOs: J&J has had just nine CEOs since it was founded in 1886. Long-tenured CEOs mean that J&J's corporate strategy remains on track and investors get a clear picture of what's going on at the company.

5. Healthcare is mostly inelastic: Johnson & Johnson's share price may drop during stock market corrections, but the branded drugs, medical devices, and most healthcare products it sells are fairly inelastic. People can't control when they're going to get sick, meaning there's always demand for J&J's products regardless of how good or bad the economy is doing.

Image source: National Cancer Institute.

6. Medical devices: Between 2012 and 2030, the number of Americans aged 65 and over is expected to grow by roughly 30 million to more than 70 million. This works out to be an intriguing long-tail growth opportunity for J&J's world-leading medical device segment.

7. Aristocrat status: J&J is among an elite class of roughly 50 publicly traded stocks known as Dividend Aristocrats. Dividend Aristocrats have raised their dividend in each of the past 25 years at minimum. In J&J's case, it could be looking at its 54th consecutive annual increase later this month.

8. Dividend yield: Not only is J&J's dividend on the rise, but its current yield of 3% easily surpasses the average yield of the S&P 500 by about a third. J&J's dividend can help you beat the market and stay ahead of the inflation rate.

9. Payout ratio: J&J's $3 annual dividend works out to just 48% of the $6.20 it earned in adjusted full-year EPS for 2015 and is just 46% of the estimated $6.51 in adjusted full-year for 2016. Translation? Further dividend increases are likely.

10. Stock buybacks: In October, J&J's board announced the approval of a $10 billion share repurchase program. Buying back stock can reward investors by boosting EPS (since there are fewer shares outstanding), which in turn can make J&J look more attractive from a valuation perspective and boost its share price. 

Image source: Pictures of Money via Flickr.

11. AAA credit rating: Only three publicly traded companies bear the highly coveted AAA credit rating from Standard & Poor's -- and J&J is one of them. This symbolizes Standard & Poor's utmost confidence in J&J's business model and its ability to repay its $20 billion in debt.

12. Cash and cash equivalents: J&J ended the latest quarter with $38.5 billion in cash and cash equivalents, or $18.5 billion in net cash. This gives J&J a number of options when it comes to rewarding its shareholders or buying companies to augment its pharmaceutical or medical device product portfolios.

13. Philanthropy: J&J donated $157.2 million in cash in 2013 to assist in global health causes and to train midwives and nurses both domestically and abroad, according to J&J is supporting the greater good and safely has the capital to do so. 

14. Free cash flow: Speaking of capital, J&J's absolute "worst" year over the last decade involved it generating $11.4 billion in free cash flow. Comparatively, it generated $15.8 billion in FCF in 2015. Steady FCF production gives J&J a lot of growth flexibility.

15. Imbruvica: J&J partnered with little-known Pharmacyclics in 2011 to help develop what would become known as Imbruvica, a game-changing blood cancer drug that's dramatically boosted patient response rates and could deliver $7 billion in peak annual sales.

Image source: Johnson & Johnson.

16. Darzalex: Darzalex is a newly approved third-line and up multiple myeloma drug developed with Genmab that generated a clinical response in nearly a third of patients who'd progressed on a median of five prior therapies in a late-stage trial. It could develop into a major treatment weapon against multiple myeloma.

17. Invokana: Invokana is an SGLT2-inhibitor that gives type 2 diabetics a new treatment option. It also happens to induce weight-loss as a positive side effect of controlling glycemic balance, and may even lead to a reduced risk of death. Long-term cardiovascular study data on Invokana is due later this year to determine if that last point is in fact true.

18. Blockbusters: Between 2009 and mid-2014, J&J brought 14 novel medicines to market, seven of which have grown into blockbusters with $1 billion or more in annual sales. This is a sign that J&J has a good grasp on how to properly launch new products.

19. Operating margin: Operating margins in the drug manufacturing industry run, on average, around 16%. J&J, which is technically dragged down in operating margin by its medical device and consumer healthcare segment, trounces the industry average with a 26% operating margin.

20. Institutional ownership: Just shy of 2,200 institutions currently own shares of Johnson & Johnson. This works out to about 67% of its float held by professional investors and traders, which certainly suggests that there's quality inherent in J&J's business model.

Did I miss something? Sound off below why you'd consider staying loyal to J&J over the long-term.

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