Johnson & Johnson (JNJ, Financial) is a leading company in the pharmaceutical and consumer health care industries that was founded in 1886. One of the most recognizable brands in the world with a well-established business, it is no hot growth stock that will explode overnight, but is instead a "boring" business that provides essential products and has proven its ability to grow profitably in the long run.
Strong economic moat
Johnson & Johnson is a multinational corporation that operates in the health care sector, with a diverse range of products in pharmaceuticals, medical devices and consumer goods. Factors that contribute to Johnson & Johnson's economic moat include a wide product portfolio, a very strong brand, continuous investments in research and development and a global presence to name a few.
The company has a wide range of products across different segments of the health care industry. This diversification helps the company mitigate risks associated with individual products or segments and allows it to capture opportunities in various health care markets.
Johnson & Johnson has built a strong brand reputation over the years, characterized by trust, reliability and quality. The company's well-known brands, such as Tylenol, Band-Aid, Neutrogena and many others, have become household names. This brand recognition creates a significant barrier to entry for competitors and fosters customer loyalty, which is crucial in the health care industry.
The company invests heavily in research and development to drive innovation and develop new products. Its R&D efforts focus on advancing medical science, improving patient outcomes and addressing unmet medical needs. This commitment to innovation helps Johnson & Johnson stay ahead of its competitors and maintain a competitive edge in the market.
It has a global presence and operates in over 60 countries. The company's extensive distribution network enables it to reach a wide customer base and effectively distribute its products worldwide. This global reach provides economies of scale, facilitates market penetration and makes it challenging for competitors to replicate Johnson & Johnson's extensive distribution capabilities.
Business challenges
The health care industry is highly regulated, and compliance with various regulations is essential for market success. Johnson & Johnson has established a strong track record of regulatory compliance and has developed expertise in navigating complex regulatory environments. However, it has had some issues in the past, such as the baby powder lawsuit, though I think this is unavoidable for any big pharma company.
While Johnson & Johnson enjoys a strong economic moat, it is important to note that there are business and economic challenges to be addressed. The company still faces challenges such as increasing competition, potential litigation risks and evolving market dynamics.
An impressive dividend history
Johnson & Johnson is a dividend aristocrat, which is a company that has been increasing its dividend consistently for at least the past 25 years. Johnson & Johnson has 62 consecutive years of dividend increased, and its dividend yield of 2.8% is higher than the industry average dividend yield of 1.58%. This makes Johnson & Johnson a prime candidate for income-oriented investors.
The dividend payout ratio of 0.95 may seem high, but I believe it is sustainable as the company generates not only consistent positive free cash flows but also strong positive operating cash flows. Adding the fact that the company has consistently increased its retained earnings and at the end of 2022 had paid $11.68 billion in cash dividends and had $128.35 billion as retained earnings on its balance sheet for the same year, I do not think the solid dividend track record has any major risk.
Strong fundamentals
Johnson & Johnson has a GF Score of 82 out of 100, signaling good outperformance potential according to a historical study by GuruFocus. The company received high ratings for profitability and growth, the financial strength and value ranks are more moderate, whereas the momentum rank is very low.
The GF Value chart indicates that the stock is modestly undervalued.
I am not worried about the financial results for the quarter that ended in March 2023, when the company reported a net loss of $68 million, or 3 cents per share, as this was mostly related to its talc baby powder liabilities and costs tied to the upcoming spinoff of its consumer health business. These are non-recurring items, and while painful at first, ligitagion costs mean the issue is being resolved.
Long-term profitability and growth
The long-term historical picture shows that Johnson & Johnson has been profitable for the past 10 years and even grew at an attractive pace. The three-year revenue per share growth rate is 5.2% and the three-year Ebitda per share growth rate is 5.8%.
Looking ahead, according to estimates from Morningstar analysts, the future three-to-five-year EPS without NRI growth rate is 10.7%.
Along with earnings for the quarter ended March 2023, the company raised its full-year guidance, mentioning strength in units including the pharmaceuticals segment.
Overall, I consider Johnson & Johnson's stock to be attractive. The solid dividend yield is of paramount importance, but we should not ignore that this iconic company has historically delivered consistent profits and growth and has a strong balance sheet.
