Johnson & Johnson (JNJ) provides healthcare products across three segments: Consumer, Pharmaceutical, and Medical Devices. The Consumer segment includes products used in baby care, oral care, beauty, over-the-counter pharmaceutical, women’s health, and wound care markets.
Next, the Pharmaceutical segment focuses on therapeutic areas like immunology, infectious diseases and vaccines, neuroscience, oncology, and more.
Lastly, the Medical Devices segment offers products used in the orthopedic, surgery, cardiovascular, diabetes care, and eye health fields.
I am neutral on JNJ stock, considering its decision for a future spinoff of its Consumer Healthcare Business is risky. Nevertheless, I consider it among the Top Dividend Stocks based on its dividend history.
The stock may have underperformed S&P500 in 2021, but its low beta makes it suitable for investors looking for exposure to defensive stocks.
Johnson & Johnson Business News
Probably the most important news for Johnson & Johnson came in November, with its decision to separate its Consumer Health Business into a new publicly-traded company. This separation is expected to take 18 to 24 months to complete.
I argue that all the strategic goals that supported this separation of the Consumer Health Business, such as increased management focus, addressing differing industry trends, and focus on better capital allocation, could continue to be pursued under one business entity.
The pursuit to unlock value is more than welcome by investors and should be the main goal for any publicly-traded company. I also believe that creating a different financial profile for each business and the goal to “align corporate and operational structures, so each company is better able to drive growth and value creation.” carries a lot of ambiguity.
It is the management of each company that better knows key challenges, weaknesses, new opportunities, and its actions and results that drive growth or not. However, the sales of Johnson & Johnson’s COVID-19 vaccine have been very weak.
The decision of the CDC to suggest the use of other pharmaceutical companies’ vaccines against COVID-19 shows that Johnson & Johnson has lost the battle, at least in the U.S market, not only in sales but mostly in credibility. This, of course, is true only for the battle to end the pandemic with the vaccine rollout programs.
Other than that, Johnson & Johnson has a very strong portfolio of brands, including Neutrogena, Listerine®, BAND-AID®, that should continue to deliver strong financial results for the new Consumer Health Company.
I would expect a reason to support this key decision of imminent spinoff that would be more analytical and factor-driven.
Back to the pandemic, there has been some good news for JNJ: “The Janssen Pharmaceutical Companies of Johnson & Johnson announced today that Health Canada has approved its single-shot COVID-19 vaccine to prevent COVID-19 in individuals 18 years of age and older.”
Reasons of Concern About JNJ Stock
The third quarter of 2021 financial results was mixed, with a beat on earnings and a miss on revenue. Adjusted EPS of $2.60 per share were better than the consensus of $2.35. Revenue of $23.34 billion lagged the consensus of $23.72 billion.
The company has a strong balance sheet with a debt/equity ratio of 0.48 as per the latest quarter, and J&J increased its full-year earnings guidance to a range of $9.77-$9.82, higher than the previous range guidance of $9.60-$9.70.
I am concerned about the very weak sales growth, which was less than 1% for both Fiscal 2019 and 2020, the negative net income growth for Fiscal 2019 and 2020, and almost stagnant EPS diluted over the past three fiscal years.
On the positive side, Johnson & Johnson shows a relatively stable trend in gross margin, operating margin, and net margin over the past three fiscal years. Its lack of growth is problematic and raises doubts about the stock performance in 2022.
Valuation
JNJ stock is relatively expensive based on its P/E ratio of 25.3x compared to the U.S. pharmaceuticals industry average of 23x and based on its PEG ratio of 4.3x.
Wall Street’s Take
Turning to Wall Street, Johnson & Johnson has a Strong Buy consensus rating based on six Buys and one Hold rating. The average Johnson & Johnson price target of $189.83 implies 10.2% upside potential.
Conclusion
Income investors can continue to favor the JNJ stock and its stable, reliable dividend. The upcoming spinoff will take time to be completed; meanwhile, the stock is an income play but not a growth-oriented investment choice.
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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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