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

by Tom Taulli | April 18, 2012 11:33 am

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

JohnsonJohnsonLogo e1282585796958 Should I Buy Johnson & Johnson? 3 Pros, 3 ConsFor the most part, Johnson & Johnson‘s (NYSE:JNJ[1]) 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[2]. 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[3]) and Merck (NYSE:MRK[4]), are facing “patent cliffs”[5] — 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[6], NYSE:BRK.B[7]) Warren Buffett.

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

Tom Taulli runs the InvestorPlace blog IPO Playbook[8], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[9]“All About Short Selling”[10] and “All About Commodities.”[11] Follow him on Twitter at @ttaulli[12] or reach him via email[13]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  2. top dividend stocks in the Dow Jones Industrial Average: http://investorplace.com/2012/04/top-10-dow-dividend-stocks-for-retirement-investors/
  3. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  4. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  5. “patent cliffs”: http://investorplace.com/2012/03/why-investors-neednt-fear-the-patent-cliff/
  6. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  7. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  8. IPO Playbook: http://investorplace.com/ipo-playbook/
  9. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  10. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  11. “All About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  12. @ttaulli: https://twitter.com/ttaulli
  13. email: mailto:tom@taulli.com

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