Shares of Johnson & Johnson (JNJ) didn’t jump much after the company’s earnings report this week, but they’ve still been sizzling so far in 2013. Year-to-day, JNJ stock has posted market-beating 31% gains.
That isn’t normal for Johnson & Johnson stock, which is usually a pillar of consistency. Over the past three years, the average annual return for JNJ stock was just under 16%.
With that in mind, the obvious question is whether or not JNJ can keep up the momentum. To see, let’s take a look at the pros and cons:
Global Powerhouse. Every day, over 1 billion people use JNJ products. One reason: Johnson & Johnson has a broad platform, which includes consumer health products, medical devices and diagnostics, along with pharmaceuticals. In fact, the company’s drug portfolio is extensive, covering key areas like immunology, infectious diseases, neuroscience and oncology.
Focus on Innovation. Last year, JNJ shelled out about $7.7 billion for research and development — and so far it’s been getting some nice results. In the latest quarter, global drug revenues for JNJ jumped by 10% to $7.04 billion because of strong sales from offerings like Simponi, Stelara and Zytiga. Unlike many other pharmaceuticals stocks, JNJ has been able to deal with patent expirations by building a strong pipeline. For the cherry on top, JNJ has also been aggressive with acquisitions and collaborations.
Solid Financials. The dividend for JNJ stock yields an attractive 2.9%, while Johnson & Johnson management has increased the payout for a stunning 51 consecutive years. Plus, earnings for JNJ stock have increased for 29 straight years, while the company boasts a AAA credit rating, which only three other companies have. With that in mind, there should be little concern that JNJ will shelling out and bulking up its sweet dividend.
Headwinds. While the drug business has been strong for JNJ, the consumer products segment has been flat. That’s because it’s a fairly mature industry and the global economy remains dicey. Plus, the even bigger concern for JNJ is its devices business. In the latest quarter, revenues fell by 2%. Once again, the global economy is the main headwind, as patients are not electing to undergo as many surgeries.
Valuation. Shares of JNJ stock are certainly not selling at a discount. The trailing price-to-earnings ratio for JNJ stock is over 20, compared to respective multiples of 8 and 11 for Pfizer (PFE) and Eli Lilly (LLY). And JNJ stock looks frothy based on its forward P/E ratio too, with the current pricetag sitting at nearly 16 times 2014 earnings.
Quality. Over the past few years, Johnson & Johnson has had huge problems with quality control. The result was a spate of recalls. While it looks like the company has been able to get things on track, there is always the risk of more issues. Besides, JNJ still must deal with the resulting litigation, such as for Risperdal (a surgical mesh product).
JNJ stock is not without issues. As noted above, there are troubling signs with its devices unit and quality control has been a problem. But the good news is that the pharmaceuticals side looks promising for Johnson & Johnson. Plus, the company is planning to launch several new products, which should boost revenue growth and also have juicy margins.
More importantly, JNJ has always been focused on the long term, which has meant that the company has remained a financial powerhouse and continues to sport a nice dividend.
Given all these factors, the pros outweigh the cons on the stock — even after this year’s run-up.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.