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Will Johnson & Johnson's woes attract Warren Buffett?

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freehling
Jul 22, 2010
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Much of Warren Buffett ’s immense wealth has been derived from snapping up shares of top-notch brand names undergoing some type of temporary problem.

He did that with Coca-Cola, American Express, The Washington Post and more. Now it remains to be seen whether he sees the same prospects in Johnson & Johnson.

Johnson & Johnson’s stock has laid an egg of late due in part to all the negative headlines surrounding the company’s quality control issues at factories producing its many well-known consumer healthcare products, some of which have been recalled as a result.

Today’s trading is a good example. While the major indices are up more than 2 percent on bullish earnings reports, JNJ is down fractionally and is now near its 52-week low.

While the quality control issues are nothing to sneeze at, they seem like a fixable issue for a company whose history dates back more than a century and whose trusted brands are sold all over the world.

These types of temporary problems involving a storied franchise such as JNJ have drawn Buffett’s interest in the past, and may do so again--especially considering Buffett’s recent history with JNJ.

Buffett started buying shares of JNJ for Berkshire Hathaway in early 2006 and did so most recently in the second quarter of 2009. He reduced the stake at the end of 2008 and 2009, and sold still more shares in the first quarter of 2010. But he wrote in the last two annual letters that he would have preferred to keep the shares and believes they’ll appreciate over time. He wrote that the sales were needed to finance large purchases such as Burlington Northern Santa Fe while keeping Berkshire’s cash stake robust enough to satisfy insurance regulators.

At the end of the first quarter of 2010, Berkshire still had a stake in JNJ worth about $1.4 billion at today’s prices, making it the firm’s 10th-largest common-stock holding. We’ll find out soon whether he made any JNJ transactions in the second quarter.

Buffett has been leaning more heavily toward buying entire companies of late, but if he did look to common stocks during the second quarter and over the past month it seems likely that he would have at least reviewed JNJ. His 2009 letter to shareholders showed that Berkshire’s average cost per JNJ share was $60.43--or about 6 percent higher than where the stock is now.

Johnson & Johnson has about a 12 price-to-earnings ratio and a nearly 4 percent dividend yield at a time when the 10-year Treasury note is yielding 3 percent. Its dividend payout ratio is under 50 percent, suggesting its long history of increasing payouts isn’t in jeopardy. The company has been looking at making acquisitions with its considerable cash stake to boost its pharmaceutical-related profits.

This has the look of the sort of short-term problems/long-term storied franchise that Buffett likes, assuming he’s focusing his attention on common stocks amid his quest for entire companies to buy.

Disclosure: Long JNJ

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