Reduced Opioid Payout Is No Reason to Buy Johnson and Johnson Stock

Despite this small victory, JNJ faces several more lawsuits

Johnson & Johnson (NYSE:JNJ) stock rose in trading on Friday as the company received a small reprieve. The landmark lawsuit in Oklahoma brought a reduced verdict for Johnson and Johnson.

Negative Press Presents a Buying Opportunity with JNJ Stock
Source: Sundry Photography /

However, holders of JNJ stock still have to worry about the costs of lawsuits in 49 states. Paying those verdicts could bring reputational damage to the company that would take decades to repair, if it can fix its image at all. With the likely pain J&J faces over the next few years, investors should stay out of the stock for the foreseeable future.

On Friday, a judge in Oklahoma’s highly publicized opioid case reduced the penalty Johnson and Johnson must pay by more than $100 million. A court found JNJ guilty of deceptive marketing practices regarding these painkillers. The previous judgment of $572 million fell to $465 million.

Judge Thad Balkman sided with the drug giant amid allegations he had made a mathematical error. This took JNJ stock higher by more than 3% on Friday. Shares closed Nov. 15 at $134.94, setting a new high since the initial verdict came down in August.

The Fallout Has Only Just Begun

However, Johnson and Johnson faces about 2,700 additional lawsuits in other states for this same issue. This means the verdict in Oklahoma is likely the tip of the iceberg. A state accounting for 1.2% of the U.S. population accounts for $465 million in settlement costs. Extrapolate this to the remaining 98.8% of the nation, and it comes out to just under $39 billion in settlement costs.

$39 billion is admittedly a rough estimate. Moreover, Johnson and Johnson has begun the appeal process. But the company likely faces years of verdicts and appeals. As long as this remains in the news, I see it as a negative for JNJ stock.

The company holds about $18 billion in cash as of the end of the third quarter. It also has accumulated around $29.2 billion in total debt. Hence, using cash and additional debt to pay this settlement would leave the company with about $50 billion in debt if the $39 billion estimate turns out to be correct. This would amount to a heavy strain for a company with close to $58.2 billion in equity.

Furthermore, the crisis will likely remain with us for some time. The National Institutes of Health estimates that about 2 million Americans face opioid use disorders. The Centers for Disease Control and Prevention reported a 200% increase in the rate of opioid-related deaths since 2000. The ads that the state of Oklahoma dubbed a “brainwashing campaign” likely contributed to this increase.

JNJ Stock and Image Repair

The above calculation indicates Johnson & Johnson can survive this crisis without getting into financial problems as deep as General Electric’s (NYSE:GE). But compared to Boeing’s (NYSE:BA) 737 Max issues, JNJ faces far more years of reputational repairs and higher possible costs.

For one, this could cost JNJ its AAA credit status. Currently, only Johnson and Johnson and Microsoft (NASDAQ:MSFT) hold such a rating. Following the Oklahoma verdict, Moody’s adjusted its outlook on JNJ’s credit rating from “stable” to “negative.” Should Moody’s downgrade, I would expect a massive decline in JNJ stock.

Secondly, JNJ stock has increased its dividend for 56 consecutive years. Settlement costs could also force a cut in its $3.80 per share dividend that it has built over the decades. Cutting that payout would cause potentially irreparable damage.

Products such as Aveeno, Band-Aid and Tylenol account for a small percentage of the company’s revenue. However, they can help repair its reputation over time. JNJ will eventually move on, and it will resume moves higher in the long run. However, the damage has only just begun, and I would stay out of J&J until the full effects of its role in the opioid crisis become clear.

The Bottom Line on Johnson and Johnson

Friday’s increase is no reason to buy Johnson and Johnson. Having the Oklahoma verdict trimmed by $100 million helps a little. However, these lawsuits will remain in the news for years to come and cost JNJ billions. Moreover, paying off these settlements may cost the company its AAA credit rating and its dividend aristocrat status.

JNJ stock may still rise in the long term. However, I do not recommend sticking around for this short- and medium-term pain.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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