Why Investors Should Buy Johnson & Johnson Stock on Every Dip

JNJ stock could be just what the doctor ordered for long-term portfolios if volatility increases and the broader markets decline

Tweets from President Trump on May 5 sent stocks prices tumbling on Monday. Once again, many investors are wondering if the U.S.-China trade wars may cause the broader markets to be volatile and decline for a long time.

Legal Risk Weighs on Johnson & Johnson Stock
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Even before investors became more worried about the trade dispute this week, I have been noticing more mentions of the dreaded “r” word in the media. While analysts are divided as to whether many economies, including the U.S., could be headed toward a recession in the near future, any further tension between the U.S. and China could easily result in an economic slowdown. Therefore investors could benefit from seeking to recession-proof their portfolios.

Certain industries and stocks tend to do better during times of slower economic growth. One such stock is Johnson & Johnson (NYSE:JNJ), the consumer and pharmaceutical healthcare giant. Before we look at the fundamentals of JNJ stock, let us briefly discuss the economy.

The Inverted Yield Curve

Are we almost at the tail end of nearly a decade of economic growth?

Although there have been a few short-lived downturns over the past ten years, most economies have benefited from stable growth since the recession of 2008-09.

However, in March as well as in December 2018, fears of a U.S. recession hit the headlines, as analysts highlighted that the yield curve of the U.S., had become inverted for the first time since 2006.  Many analysts warn that an inverted yield curve may signal an upcoming recession.

JNJ Stock Operates in a Resilient Industry

Defensive companies usually benefit from constant demand for their products or services and aren’t typically correlated to the rest of the business cycle. Healthcare companies are considered to be defensive, and their shares might perform well during a recession.

By healthcare, I mean pharmaceutical companies, as well as medical device manufacturers and those that operate healthcare facilities. Some healthcare companies may also sell consumer products.

We all get sick occasionally or have friends and relatives who may need treatments for chronic illnesses. Moreover, according to the U.S. Census Bureau, the population of the U.S. is getting older and in about two decades, elderly adults will outnumber children for the first time in our history, so the country will need more healthcare facilities and drugs.

Johnson & Johnson operates in three segments that provide it with diversified sources of revenue, earnings and cash flow:

  • Pharmaceutical (contributes more than 50% of JNJ’s pretax profits)
  • Consumer
  • Medical Devices & Diagnostics

JNJ’s pharmaceutical division provides treatments for immunology, cardiovascular and metabolic diseases, pulmonary hypertension, infectious diseases and cancer.

Several well-known brands within its consumer division include Aveeno, Band-Aid, Johnson’s Baby, Neutrogena, Rogaine, Tylenol and Zyrtec.

JNJ’s medical devices segment develops and markets products and solutions for surgery, orthopedics, and vision.

JNJ’s diversification enables the company to withstand economic cycles more effectively. No matter what the economy does, consumers  will buy the products of many of these strong brands, and JNJ will have industry-leading market share in many areas.

JNJ Stock Offers Growth

When major stock indices and economies struggle, I look more than ever for companies that offer fundamental value and growth potential, as well as proven stability. Overall, JNJ stock fits all of those criteria well. Year-to-date JNJ stock is up 10%.

On Apr. 16, the company reported better-than-expected Q1 results, as its sales increased to $20.02 billion. JNJ’s earnings per share  rose 1.9% to $2.10. Its pharmaceutical business grew 7.9%. Similarly, its medical devices unit grew 4.3% and its consumer sales increased 0.7%. Finally, Johnson & Johnson raised its full-year guidance.

The Bottom Line on Johnson & Johnson Stock

No investor has a crystal ball that can predict the markets’ next move with certainty, but now could be an appropriate time to become a little defensive. Therefore, mega-cap healthcare stocks may be appropriate for diversified portfolios.

I remain bullish on the long-term outlook of Johnson & Johnson stock. However, in the short-term, investors may take some profits in JNJ stock, too.

As a result of the recent run-up in JNJ stock, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that JNJ stock has also become “overbought.”

Therefore,JNJ stock might drop towards the $135 level, where the stock is likely to find major support in the coming weeks.

If you aren’t already long JNJ stock, you may want to remain on the sidelines and wait for a pullback.  I’d consider buying covered calls in conjunction with going long on Johnson & Johnson stock.

I find JNJ stock compelling. By the end of 2020, I expect the shares to reach $160.

Finally, investors who buy Johnson & Johnson stock now will enjoy a dividend yield of 2.7%.  The conglomerate has raised its dividend each year for over half a century. With its diverse range of products, I think JNJ is likely to continue to be a high-dividend staple stock. And dividends tend to create a “price floor” for stocks during market downturns.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.


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