Multinational giant Johnson & Johnson (JNJ, Financial) announced its quarterly results about a month ago, and they were not just poor compared to the quarter before but also did not meet analysts’ expectations. This was a second consecutive quarter of poor performance and in a sign of bad times continuing, the management also revised downwards its guidance for the rest of the year, despite domestic sales growing. However, since much of the bad performance is being blamed on currency headwinds, a result of a strong dollar and the company’s massive overseas business, should investors keep away from this stock? Or should they instead pick it up while the price is still more or less stagnant and range-bound?
A strong business
Johnson & Johnson sells medical devices including all sorts of hospital equipment, is also a pharmaceutical heavyweight and, of course, is very well known for its packaged consumer goods, such as its famous baby oil. This diversity in its product portfolio makes its stock very attractive. The company doesn’t just have a presence in the product segments it operates in but does very well for itself, too, with the consumer segment growing by 3.4% and the pharmaceutical segment growing by 10.2% in the last quarter, not considering the currency exchange factor. The company has an incredible AAA credit rating and at least 16 of its 24 strong brands are in the top two in sales in the markets they operate in.
Good to investors
From a technical perspective, Johnson & Johnson is pretty reasonably valued. Currently, it trades at a P/E ratio of about 18 times its last earnings and 16 times to estimates for next year. Compare that to competitors Pfizer (PFE, Financial) at over 23 times trailing earnings or AstraZeneca PLC (AZN, Financial) at close to 70 times trailing earnings, and the value becomes clear.
The company has a stellar track record of being good to investors, having recently announced a consecutive 53rd increase in annual dividend pay-out, and there are few other companies that can claim to beat that. The company has given investors a total return of 196% on their investment in the last 10 years. The company maintains a healthy cash flow despite this, and that allows it to spend on capital on core business practices such as R&D, acquisitions and share buybacks, all of which in turn are again good for the investor in the long run.
Non-business aspects
The company recently announced it is going to increase the amount of parental leave it gives its employees by an additional seven weeks. This new policy applies to all new parents, whether they are mothers, fathers and same-sex parents or have adopted children. In another recent announcement, the company says it is starting a program with New York University’s medical ethics division to get ethical advice on its experimental drug trials. While both these factors don’t have a material impact on the company’s business, they create a lot of goodwill around the brand which always helps in the long run.
Conclusion
The strong dollar is causing problems for all big multinationals headquartered in the U.S. and Johnson & Johnson is no exception. But the company has a strong core business and a diversity of products that are sure to keep it going. It is also very considerate of its shareholders, as borne by the consecutive dividend increases for 53 straight years. Given the current lull in its stock price, we recommend a BUY on this stock.
