Johnson & Johnson (NYSE:JNJ) is not the world’s most exciting stock, and it’s been a fairly underwhelming past two years even by J&J standards. Two years ago, JNJ stock was trading around $130 per share. It’s back there again today.
JNJ stock has underperformed the market recently on a variety of short-term worries. These include its potential liabilities in various product lawsuits, weak drug pricing, and regulatory and political concerns.
In the long run, however, the stock’s short-term weakness could be setting up an opportunity. Because while shares have stalled out, Johnson and Johnson’s dividends go up every year. That’s in stark contrast to interest rates, which are plummeting again.
Interest Rates Are Going to Zero, And Beyond
There seems to be almost no limit to how low bond yields can go. In the United States, long-term treasury yields have plummeted back to their lowest levels in decades.
The 10-year treasury yield, for example, hit 1.5% in 2016. That appeared to be a generational low – in 2017 rates soared as investors factored in more growth and inflation from President Trump’s Administration. This never panned out however, and the 10-year yield has plunged back to the 2016 lows.
Overseas, it’s even more dramatic. All told, the world has roughly $15 trillion in debt that has a negative yield. That means that you buy these bonds today, you’ll get less back through maturity than you pay upfront. You literally would get better returns putting money in your mattress.
The madness doesn’t stop there. Some European junk bonds (that is, companies with poor credit) now have negative-yielding bonds. Even companies with flimsy balance sheets now get to borrow for free or next to nothing. On the flip side of the coin, we just heard about a European bank that will start offering negative interest mortgages. In English, that means that homeowners will be paid to take out a mortgage.
J&J Faces Short-Term Headwinds
With all that in mind, it’s worth taking another look at high-quality blue-chip stocks like Johnson and Johnson. Not everything is going perfectly for Johnson and Johnson right now.
Read my previous article about the company, which discusses its exposure to liability lawsuits, among other things, for more perspective.
And I stand by that call. If you are a short-term trader, this isn’t a great time to pick up JNJ stock. The company faces short-term challenges from lawsuits, pressure on drug pricing, and potentially harmful changes to the health care regulatory structure in the U.S. It’s not all blue skies for Johnson and Johnson at this very moment.
Johnson and Johnson Is a Health Care Titan
However, if you are looking at JNJ stock as an alternative to bonds or other fixed income, the situation changes dramatically. As I said in my article on Johnson and Johnson’s opioid and talc issues, that’s a short-term headwind for JNJ stock. But the long-term picture remains extremely bright.
J&J is a highly diversified company. In effect, it runs as a conglomerate, giving its independent brands and divisions plenty of room to manage their own affairs. This greatly reduces risk, as any single product or drug’s sales don’t pose much risk to the overall franchise.
On a bigger level, J&J operates in three main segments. They have consumer products for things such as baby and skincare. They have medical devices. And they have pharmaceutical drugs.
The huge range of products and different needs that J&J serves greatly protects the company from competition, economic downturns, and specific government regulation. For more than a century, Johnson and Johnson has prospered through numerous depressions and world wars.
Fixed Income Isn’t Paying Very Much Right Now
Over the next three months or even a year, anything can happen. If you hold Johnson and Johnson as a long-term investment in place of bonds, CDs, or other fixed-income products, however, the odds are skewed highly in your favor.
Let’s look at two concrete examples. First, what happens if you buy an FDIC-insured bank CD right now? As of this writing, the highest CD rate available on a five-year term from a nationally-known bank is 2.65% from Goldman Sachs (NYSE:GS). Give their bank $1,000 and you’ll get back a guaranteed $26.50 every year for the next five years, or $132.50 in total interest, plus your $1,000 of principle.
Now let’s turn to five-year government treasury bonds. These are not insured by the FDIC, but are backed by the full faith and credit of the U.S. government, which is still highly rated despite its flaws. At this time, five-year treasury bonds yield 1.5%. Buy $1,000 of one of these bonds, and hold to maturity, and you’ll get your $1,000 back plus $15 annually in interest. That’d be $75 total. Not as good as the Goldman Sachs bank CD.
JNJ Stock Will Crush Bonds If You’re Patient
JNJ stock, on the other hand, is currently yielding 2.9%. Invest $1,000 in it, and you’ll get back $7.25 every three months, or $29 annually. If nothing changed, you’d get back $145 in dividends over the next five years, comfortably beating the bank CD at $132 and the government bond at $75. But things get better. Historically, Johnson and Johnson raises its dividend by about 7% every year.
This means that while you’re getting $29 of dividends from Johnson and Johnson stock this year, by the fifth year, you’d be getting $41 annually. Over time, the numbers continue to grow.
Had you bought JNJ stock a decade ago, it’d be paying back nearly 10% of your initial investment annually. Bonds and CDs, however, never see their yields go up over time. Also, while nothing is guaranteed, more often than not, JNJ stock will appreciate in value, giving you a capital gain in addition to your rising dividend yield.
In a world where interest rates are going lower and lower, Johnson and Johnson stock looks like a fantastic bond alternative. At its relatively high valuation and with the lawsuit overhang, is the stock going to crush the market over the next year or two? Probably not. Will it beat fixed income investments over the next five, ten, or twenty years? There’s a great likelihood that it will.
At the time of this writing, Ian Bezek owned JNJ stock and GS stock. You can reach him on Twitter at @irbezek.
