InvestorPlace feature writer James Brumley recently named the 10 Best Stocks to Buy and Hold Forever. Included in the group was Johnson & Johnson (NYSE:JNJ). While owners of JNJ stock have been handsomely rewarded over the past decade, I wonder where it ranks among the other nine companies on Brumley’s list.
I have nothing against Johnson & Johnson. I use a number of its products, including Band-Aid, Aveeno, Listerine, Reactine and Tylenol. Part of Brumley’s argument for owning JNJ stock for the long haul is that the company is so much more than these products.
In fiscal 2018, JNJ’s consumer division, which includes all of the brands listed above, had $13.9 billion in revenue and $2.3 billion in pre-tax income. That seems like a lot, but it accounted for just 16.7% of the company’s overall revenue and 12% of its pre-tax income.
While we recognize so many of its consumer brands, that’s not where the growth is; it’s in pharmaceuticals. But that’s a subject for another day.
In February, I wrote an article discussing how JNJ stock owners have paid a big price in the seven years that Alex Gorsky has been CEO.
Sure, Gorsky’s delivered above-average shareholder returns during his tenure as CEO, but given the strength of the markets over this period, it’s safe to assume that other’s in the healthcare industry could have done just as well at a much lower rate of compensation.
Perhaps shareholders have become lackadaisical because it’s hard to fathom someone making more than $400 million (that’s only on JNJ stock) over seven years without expecting the world from him or her.
A Little Contest
There are many ways to determine if a stock is worth holding forever. For this article, I’m not going to use any of these metrics. Instead, I’m going to look at the total compensation of the ten CEO’s on Brumley’s list over the past three years. Along with that, I’ll compare the three-year annualized total return of all ten stocks.
I expect it will tell me all I need to know about JNJ stock and the other nine companies.
| Company |
Total CEO Compensation Past 3 Years |
Annualized Total Return Past 3 Years |
| Johnson & Johnson | $76.8M | 11.3% |
| AT&T (NYSE:T) | $86.2M | -1.9% |
| Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) | $3 | 15.9% |
| 3M (NYSE:MMM) | $24.7M | 10.4% |
| Walmart (NYSE:WMT) | $65.0M | 14.9% |
| Southern Co. (NYSE:SO) | $34.4M | 4.9% |
| Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) | $1.4M | 12.4% |
| Waste Management (NYSE:WM) | $23.3M* | 22.3% |
| American Water Works (NYSE:AWK) | $13.5M* | 17.6% |
| Colgate-Palmolive (NYSE:CL) | $41.6M | 1.1% |
The Results
The average annualized total return of these ten companies over the past three years is 10.9%. Six are over that return, and four are under it. Johnson & Johnson was mediocre, just three basis points higher than the average, yet its CEO was the second-highest paid of the bunch behind Randall Stephenson of AT&T, another overpaid chief executive.
Is it interesting that the two lowest-paid CEOs — excluding Warren Buffett of Berkshire Hathaway and Larry Page of Alphabet who are founders — had the two highest-performing stocks of the bunch?
I don’t think so.
Neither James C. Fish, CEO of Waste Management, or Susan Story of American Water Works, is going to be living on the streets anytime soon. Yet, if you own either of these stocks, you should be pleased with the balance between CEO compensation and shareholder returns.
The Bottom Line on JNJ Stock
Nothing anyone says will convince me that JNJ shareholders aren’t getting a bad deal from their CEO.
So, the next time you consider buying a stock, why not check on the CEO’s three-year compensation relative to its three-year annualized total return. If it’s not to your liking, take a pass and look elsewhere.
JNJ stock might be one to hold forever, but it’s not because Alex Gorsky is CEO. It’s because of the all the hardworking people behind the scenes who never make it anywhere near the C-suite.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
