After a slow start to the year, the S&P 500 has come climbing back, posting a nearly double-digit rally since early February (even after taking a breather earlier this week). Diversified healthcare company Johnson & Johnson (JNJ) began its rebound even earlier, though, bottoming on Jan. 25 and gaining 11% since then. The S&P 500’s rebound gets carved back to just 5% using the same start date.
JNJ stock has long been one of my favorite ways to play the growing healthcare space. As I’ve mentioned before, healthcare has amazing growth potential despite the fact that it’s already an enormous, established market. In fact, healthcare spending is 17% of U.S. GDP. One reason is that there simply will always be strong demand, as it underscores a basic human need. That need is also growing as baby boomers age and need more healthcare services.
Johnson & Johnson mirrors the macro state of the industry in that it’s also an established, enormous company and has plenty of room to grow despite its size and history. That’s a one-two punch investors can get on-board with.
Here’s Why JNJ Stock Is a Great Pick
Plus, there’s a laundry list of data points that support the fact that JNJ stock has rock-solid fundamentals, such as:
- Gross profit margins are around 70%
- The stock’s forward dividend yield is 2.8%. Sometimes, high yields are the result of a depressed stock price, but once again, JNJ stock has been going strong. Shares have gained 9% over the last year (while the S&P posted a loss) and 80% over the last five (nearly 50% more than the broader market).
- The strong yield is the result of more than 50 straight years of increasing the payout … and that trend is sustainable, too. The stock’s payout ratio is just 53% right now, which is lower than the five-year average.
- The P/E ratio is also in-line with the stock’s long-term average.
JNJ stock could see an additional pop when the company reports earnings in mid-April, especially considering the momentum it has heading into the announcement and considering the company has an impressive track record of earnings beats. For the current quarter, earnings growth just north of 6% is expected.
One thing to note is that Johnson & Johnson has suffered some negative publicity of late. For starters, an FDA advisory committee approved a biosimilar to the company’s arthritis treatment. While biosimilars may not be prescribed as much, they could still affect market share.
It was also announced that JNJ will have to pay $72 million to the family of a woman who blamed her fatal ovarian cancer on one of the company’s products. There are numerous similar suits in the works, too. This is the first time where JNJ has had to pay due to insufficient warnings.
Unfortunately, such competition and regulatory concerns are par for the course in the pharmaceutical industry. Johnson & Johnson is diversified enough that it can continue to ride the healthcare mega-trend higher long-term.
Its medical devices segment is growing fast, its stock has momentum and the company will continue reward loyal investors with a consistent payout. That makes for a great way to play the healthcare trend going forward.