These should be go-go days for Johnson and Johnson (NYSE:JNJ) stock. The defensive healthcare name with a dividend yield of almost 3% and little exposure to the China export market would appear to be ideally suited for a low-yield, high volatility world in which trade run tensions high and Treasury yields run low.
However, Johnson & Johnson stock is betraying its normally reliable reputation and is one of just seven members of the Dow Jones Industrial Average in the red this year. Johnson and Johnson’s 2019 loss of 0.35% is modest, but that decline underscores the point that the healthcare sector has been a disappointment this year. Moreover, there are company-specific headwinds affecting Johnson & Johnson stock.
The opioid crisis is one obvious hurdle for JNJ stock. Last month, the Cleveland County District Court ruled in favor of the state of Oklahoma, saddling JNJ with a judgment of $572 million. JNJ has a market value of about $340 billion and $15.27 billion in cash on hand, indicating $572 million is an amount the company can easily pay, but it’s opting to appeal the ruling.
“This judgment is a misapplication of public nuisance law that has already been rejected by judges in other states,” said Michael Ullmann, JNJ general counsel, following the ruling. “The unprecedented award for the State’s ‘abatement plan’ has sweeping ramifications for many industries and bears no relation to the Company’s medicines or conduct.”
Troubling Optics for Johnson and Johnson
As noted above, JNJ is a mega-cap company with plenty of cash on hand. Importantly, there are other drivers of Johnson & Johnson stock performance beyond opioids, including traditional pharmaceuticals, medical devices and consumer products.
However, the opioid crisis in the U.S. is real and companies fighting their legal exposure to the problem, though that’s well within their rights, create public relations blunders.
“For many people who abuse opioids, the problem begins with opioid prescriptions from their doctors for pain relief. Government data show that 21%-29% of patients who are prescribed opioids go on to misuse them, and 8% to 12% develop an opioid abuse disorder,” said Michael Kim, a clinical assistant professor of anesthesiology at the University of Southern California. “From 2016-2017, 800,000 people used heroin for the first time, according to the U.S. Department of Health and Human Services, with 80% starting with prescription drugs.”
What’s being lost in the headlines for Johnson & Johnson stock is the fact that opioid’s represent less than 1% of the company’s overall pharmaceuticals and that’s a relevant fact because JNJ is one of the world’s largest pharma sellers.
“Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drug Remicade and psoriasis drug Stelara,” according to Morningstar.
JNJ Stock Is a Buy Now
At barely over 14x times forward earnings robust cash flow and a steadily rising dividend, Johnson & Johnson stock is attractive right here, right now. Over the near-term, opioid headlines will persist, but prevailing wisdom among analysts following the company is that JNJ will be liable for lower payments than current headlines project.
Additionally, the company is less patent vulnerable than other blue-chip pharmaceuticals makers.
“Diverse operating segments coupled with expected new products insulate the company more from patent losses relative to other Big Pharma firms,” said Morningstar. “Further, in contrast to most of its peers, J&J faces the majority of its near-term patent losses on hard-to-make complex drugs, which should likely slow generic competition.”
Essential to the long-term thesis for Johnson & Johnson stock are the company’s abilities to grow its medical device business, which it is doing, and avoid overpaying for acquisitions, something JNJ has been guilty of in the past as the firm’s last two large-scale buys have barely moved the needle for investors.
As of this writing, Todd Shriber did not own any of the aforementioned securities.