But as should be no surprise, the company has been a long-term winner as well. For the past five years, JNJ stock has chalked up a juicy total return of 106%. But while that seems good at first glance, that’s actually about 30 percentage points lower than the S&P 500 over that time.
So the question is whether JNJ is still one of the top stocks to buy, it or whether there’s a need for some caution.
To find out, let’s take a look at the pros and cons:
JNJ Stock Pros
Diverse Healthcare Giant: Founded in 1886, Johnson & Johnson is certainly an iconic brand. The company now has 128,100 employees and 275 operating divisions. Across the world, 1 billion consumers use Johnson & Johnson products on a daily basis. The company has three main business segments, which include consumer products, pharmaceuticals and medical devices. Its biggest brands include Aveeno, Lubriderm, Neutrogena, Listerine, Band-Aid, Neosporin, Tyleonol and Motrin. For 70% of its businesses, Johnson & Johnson has the No. 1 or No. 2 global market share positions.
Pharmaceuticals: This has been the main driver of JNJ stock. Unlike many of the company’s peers — like Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY) — Johnson & Johnson has been able to keep up its innovative spark and introduce breakthrough drugs. Since 2009, there have been 13 new product launches, which have targeted diseases like Type 2 diabetes, mantle cell lymphoma, chronic hepatitis C and HIV. But the pipeline is also robust, and the importance of the pharma business cannot be overstated. Keep in mind that drugs generally have premium margins because of the patent protection. But there are also huge market opportunities as the world’s population continues to age.
Rock Solid Financials: In the latest quarter, JNJ earnings came to $4.3 billion, up about 11.3%. JNJ stock currently sports a reasonable 2.7% dividend yield, as the company has increased its dividend payout for the past 51 years. And it seems this record will not end anytime soon. Johnson & Johnson is one of the few U.S. companies that has a AAA credit rating.
JNJ Stock Cons
Valuation: JNJ stock is far from cheap, with a price-to-earnings ratio of 19. After all, there are more affordable healthcare plays, such as Pfizer, which has a multiple of 9. Thus, if there is a deceleration of revenues — which could easily happen if there are failures with upcoming drugs — JNJ stock could be vulnerable.
Medical Devices: This has been an issue for JNJ stock. If anything, the medical devices industry has been in the no-growth mode. Part of this has been the impact of the financial crisis, but there have also been ongoing pressures on reimbursement and medical costs. Now Johnson & Johnson has taken steps to address the problems. For example, the company has focused more on orthopedic devices because of the positive demographics. JNJ has also consolidated some of its operations to lower the cost structure. Despite all this, there are few signs of a return to growth.
Quality Control: A few years ago, JNJ stock got hit because of a spate of recalls. It looked like the company simply had lost control of its manufacturing process. The good news is that Johnson & Johnson has been aggressive about solving the problems. However, there will be ongoing litigation exposure. Besides, the quality-control problems are always a risk for healthcare operators — and they can quickly stop growth.
Verdict on Johnson & Johnson
Even with the lagging growth in medical devices, JNJ stock still looks attractive. The fact is that the company’s pharma business is going on all cylinders. And yes, it means continued top-line growth as well as margin expansion.
JNJ stock is also a great play on the attractive demographic trends across the world, particularly as populations get older. There are also big opportunities in foreign markets, especially in Asia. Consider that about 56% of sales still come from the U.S. market.
So, should you buy JNJ stock? Yes — all in all, the company has a strong platform and should benefit from the positive trends in the global healthcare industry.
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.