Should I Buy Johnson & Johnson? 3 Pros, 3 Cons

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Johnson & Johnson (NYSE:JNJ)For the most part, Johnson & Johnson‘s (NYSE:JNJ) recent quarter, reported Tuesday, was a mixed bag. While JNJ’s earnings rose by 12% to $3.9 billion ($1.41 per share) and beat analyst expectations, the company’s revenues were down about 0.2% to $16.14 billion thanks to a 5.1% decline in the U.S. (though foreign markets saw sales gain 4.1%).

Johnson & Johnson stock hardly budged on the news, and overall hasn’t participated in the markets’ rally this year. JNJ shares are down 1.5% against a nearly 10% gain for the S&P 500.

So should you buy Johnson & Johnson stock? To decide, let’s take a look at the pros and cons:

Pros

Broad Platform: Johnson & Johnson is a unique operator in the health care industry in that it has three core businesses. It has a pharmaceutical segment, which has high-margin drugs for categories like oncology, pain management and immunology; and it also has a business for medical devices and diagnostics.

However, JNJ also has a fairly stable consumer business, which includes products for skin care, oral care, over-the-counter products and baby care.

Acquisitions: JNJ has a proven history of dealmaking. One of the most promising deals was last year’s $21.3 billion buyout of Synthes, which develops surgical devices for the orthopedics market. It is seeing tremendous growth and should be a nice driver for J&J.

Hefty Dividend: At an attractive yield of 3.6%, Johnson and Johnson is one of the top dividend stocks in the Dow Jones Industrial Average. J&J generates substantial cash flows and even has a AAA credit rating.

Cons

Economy: True, the economy is showing improvement. But unemployment still is fairly high and consumers remain frugal. This has put pressure on J&J’s consumer business as shoppers look for cheaper products.

Quality Issues: Quality control has been an enormous problem for J&J. During the past few years, the company has seen a variety of recalls of its products, such as for Motrin, Benadryl and infant Tylenol. These have tarnished the brand and increased costs. However, new CEO Alex Gorsky, a retired Army Ranger, could help on that front.

Regulatory Risk: While J&J’s drug pipeline is strong, you can’t count out the FDA’s ability to be tough on the approval of new drugs — and J&J’s history of recalls could draw more scrutiny on the front end.

Verdict

Several pharma companies, such as Pfizer (NYSE:PFE) and Merck (NYSE:MRK), are facing “patent cliffs” — when a drug loses its patent protection and generic drug makers start to offer cheaper alternatives.

While this also is an issue for J&J, the company does have a strong pipeline of drugs, thanks in part to acquisitions. However, the deals’ positive impact on revenues likely won’t be felt until a year or more from now.

For investors, buying JNJ really is a longer-term proposition — and in the meantime, there’s a nice, juicy dividend to tide you over. Plus, it’s always good for confidence when a stock is backed by Berkshire Hathaway‘s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett.

So should you buy Johnson & Johnson? Yes — for now, its pros outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”“All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2012/04/should-i-buy-johnson-johnson-3-pros-3-cons/.

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