Shares of healthcare company Johnson and Johnson (NYSE:JNJ), while largely flat in terms of performance, dropped nearly 4.6% Friday after announcing a baby powder recall, bringing it to a well-defined support area. This, coupled with a still attractive dividend yield should get the bulls’ attention.
There are two parts to this currently bullish setup in JNJ stock: technical (chart stuff), and dividend yield.
Let’s start with a word on JNJ stock’s dividend yield. In a world where negative rates are a real thing in government bonds, in some parts of the world (even some corporate bonds in Europe have negative yields), there will likely be continued yield starvation on the part of institutional investors (think pension funds) as well as the aging population.
Think of it this way: in addition to slowing global growth we also have a demographic issue. For example in the United States the baby boomer generation is reaching peak retirement rates. This creates structural demand for bonds and as government bonds yield less and less, these investors are forced to buy high quality, ‘stable’ corporate bonds and stocks with ‘reliable’ dividends.
JNJ stock in my opinion is one such name that with a current dividend yield of almost 3% should be on the radar of many investors. In other words, I think downside is limited for JNJ stock through the lens of the dividend alone.
JNJ Stock Charts
Starting off with a multi-year chart, we see that JNJ stock has worked higher in a well-defined range and that over the past weeks and months the stock has once again worked its way to the lower end of this range. Note that the low end of the range (purple lines) currently also coincides with the stock’s red 200-week simple moving average. In other words, there is plenty of technical support here to see the stock for a bounce.
On the daily chart we note that JNJ stock has found the $125-$127 area to be support. On Oct. 18 the stock fell hard on the back of news the company was recalling baby powder. While this is an overhanging concern, it is notable that the stock a few days prior acted well on the back of its earnings report.
All in all and barring any further major damage from the baby powder recall, I see JNJ stock with limited downside from here. One could look to buy Johnson and Johnson around the mid-to high-$120s for a bounce back up into the mid-$130s.
The highest probability trade, however, that sets up well for this position in JNJ stock is to sell an out of the money put spread (options credit spread) in a very specific way. I am hosting a special webinar Wednesday, Oct. 23 to go over this setup in detail. Register here.
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