Johnson & Johnson (NYSE:JNJ) stock has been a disappointing under-performer this year. While the S&P 500 is up nearly 18% year-to-date, JNJ stock is up just 5.7% (including dividends reinvested).
The company’s countless opioid-related lawsuits have impacted the JNJ stock price. But recent developments have made the opioid litigation risks clearer. As seen from the recent settlement dollar amounts ($572 million in Oklahoma and $20.4 million in two Ohio counties), the company will likely not see the value-destroying verdicts experienced by Purdue Pharma and Insys Therapeutics (OTCMKTS:INSYQ).
However, the potential litigation risk remains massive. Multiply the 2,000+ pending lawsuits by at least $20 million, and you get at least $40 billion in potential litigation settlements. With shares valued in line with big pharma peers, the stock does not appear to be a value play. Let’s take a closer look, and see why the current JNJ stock price is not a compelling entry point.
Paging Dr. Catalyst
What positive developments could move the JNJ stock price? Despite the opioid crisis weighing on shares, Credit Suisse’s Matt Miksic is bullish on JNJ’s pharma growth prospects. He believes that once the company’s legal issues are quantified, the market will shift focus towards the pharma unit’s organic growth. This growth could drive the stock over the next few years.
If growth doesn’t do it, the company’s dividend should keep the stock from falling down further. The company pays a 2.84% yield. When I last wrote about Johnson & Johnson stock, I discussed the company’s status as a dividend aristocrat. Slow growth could impact this dividend, but luckily, the payout ratio is low (43.7%). In other words, JNJ has plenty of room to grow the dividend for the 58th year in a row.
Dividend aristocrat status provides a floor in the Johnson & Johnson stock price. But looking beyond dividends, is the stock a good value? Let’s compare the company to its big pharma peers, and see if shares are cheap on a relative basis.
JNJ Stock Fairly Valued
Johnson & Johnson stock trades in line with its peers. The company’s forward price-to-earnings ratio is 14.6. Its enterprise-value-to-EBITDA is 13.1. Here are the valuation metrics for JNJ’s myriad of big pharma peers:
- Abbvie (NYSE:ABBV): Forward P/E of 7.8; EV/EBITDA of 9.5
- AstraZeneca PLC (NYSE:AZN): Forward P/E of 10.6; EV/EBITDA of 11.5
- Bristol Myers Squibb (NYSE:BMY): Forward P/E of 8.6; EV/EBITDA of 10.4
- GlaxoSmithKline PLC (NYSE:GSK): Forward P/E of 13.8; EV/EBITDA of 10.2
- Eli Lilly (NYSE:LLY): Forward P/E of 16.3; EV/EBITDA of 15.3
- Merck (NYSE:MRK): Forward P/E of 15.4 ; EV/EBITDA of 13.9
- Novartis (NYSE:NVS): Forward P/E of 26; EV/EBITDA of 37.8
- Pfizer (NYSE:PFE): Forward P/E of 12.8; EV/EBITDA of 10.5
But JNJ is more than a pharma company. Its other units are Medical Devices and the ubiquitous Consumer Products unit (Band-Aids, Tylenol). Medical device stocks such as Becton Dickinson (NYSE:BDX) sell at EBITDA multiples above 17x. Consumer products companies like Procter & Gamble (NYSE:PG) trade at even higher EBITDA multiples (19.4x).
Perhaps someday Johnson & Johnson would find it beneficial to split the company into three. While this would likely need to occur after the opioid suits are settled, in the longer term, a “trivestiture” could unlock value in the JNJ stock price. But for the time being, investors must contend with Johnson & Johnson as a one-stop health products shop.
Pass on Johnson & Johnson Stock
I agree with InvestorPlace contributor Vince Martin’s recent assessment of JNJ stock. The company is not a short candidate. But at the same time, the stock is not a compelling buy. With its dividend aristocrat status, shares should at least tread water over the next several years. Until the litigation issues are resolved, the company will have billions in liabilities hanging over its head. While JNJ can likely afford to settle these liabilities, it still provides a headwind in the medium term.
Sometime in the future, the company could unlock value via spinoffs. The company is currently valued using pharmaceutical valuations alone. But the Consumer and Medical Devices divisions likely could fetch higher valuations.
Splitting the company is an obvious solution. In fact, activists have pushed for it in the past. But given their lack of success, don’t bank on “strategic alternatives” in the short term. For dividend investors looking for a high quality name, Johnson & Johnson stock may be a solid opportunity. For investors looking for a stock to rebound, better opportunities lie elsewhere.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.