It’s been a week since Johnson & Johnson (NYSE:JNJ) announced its Q2 results. While they beat expectations, JNJ stock has lost ground, as JNJ stock price fell 3.2% in the five trading days since it unveiled its earnings.
Looking through its earnings report, there’s a lot to like about its business, but there are also several question marks that should make investors hesitant to own JNJ at this point.
JNJ Has Failed to Deliver for Several Years
CEO Alex Gorsky proudly announced a 5.6% quarterly dividend increase on Apr. 25. JNJ stock now pays a $3.80 annual dividend that yields a respectable 2.9%. Gorsky went on to boast about the fact that the company’s increased its annual dividend for 57 consecutive years, making it one of the more impressive Dividend Aristocrats trading on U.S. markets.
While that’s true, consider that over the past five years, the annualized total return of JNJ stock is just 7.2% with approximately 2.7% of that from dividends and 2% from buybacks of JNJ stock. Only 2.5% of its annualized return was from capital appreciation.
Meanwhile, the Morningstar U.S. Total Market Index’s total return was 10.5% over the same period, 3.32 percentage points higher than the return of JNJ stock.
JNJ might have increased its dividend for 57 consecutive years, but many investors weren’t around for a lot of those years. They want results today.Up 1.2% in 2019, JNJ stock is spinning its wheels.
A Couple of Lawsuits
Of the two significant lawsuits facing JNJ at the moment, the talcum powder issue is likely the bigger one, as it relates to the company’s reputation. Johnson & Johnson’s trustworthiness as a brand is on the line. If Alex Gorsky’s crack legal team doesn’t bring the company a big win, you can bet its sales will suffer in the future.
At the moment, in addition to the 14,000 lawsuits from consumers alleging that its talc products caused ovarian cancer, the U.S. Justice Department and the SEC are investigating how much the company knew or didn’t know about asbestos in its talc products.
JNJ is on record disputing any link between its powder and cancer, despite the fact that, over the past three years, juries have awarded more than $5 billion to plaintiffs who have blamed the company for their ovarian cancer or for their loved ones’ death from the disease. Bloomberg Intelligence estimates the final costs of civil suits against JNJ could be as high as $15 billion.
Also, investors have filed lawsuits against the company alleging that JNJ failed to disclose its knowledge of the asbestos in its talc products to maintain its good name with consumers.
Lastly, on July 15, the trial between the State of Oklahoma and Johnson & Johnson over the state’s opioid crisis came to an end. The judge is expected to make a ruling in a month.
The company says it’s done everything by the book, while the state’s argued that the company knew opioids were addictive, yet continued to oversupply the marketplace.
I have no idea what the ruling will be, but two other drug companies have settled similar lawsuits for a total of $355 million.
The state of Oklahoma believes its abatement plan to deal with the opioid crisis will cost it $17.5 billion over the next 30 years.
Why would investors looking for yield pick JNJ stock when others are delivering similar returns with much less legal baggage?
The Bottom Line on JNJ Stock
Earlier this year I alleged that JNJ CEO Alex Gorsky is overpaid compared to other chief executives. My colleague, James Brumley, had previously advised investors to hold ten stocks forever. JNJ was one of them.
I concluded that Gorsky and AT&T (NYSE:T) CEO Randall Stephenson were the two highest-paid of the ten CEOs with Gorsky delivering mediocre stock performance over the past three years while Stephenson’s record was even worse.
JNJ might have healthy financials, but I can’t imagine why anyone interested in a safe investment would get into bed with a company that’s got such a black cloud hanging over it.
I can think of plenty of Dividend Aristocrats to buy for the long haul. JNJ stock isn’t one of them.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
