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Sangara Narayanan
Sangara Narayanan
Articles (562) 

Why Berkshire Hathaway Dumped Johnson & Johnson

JNJ was growing. Is there something more to the story?

July 19, 2016 | About:

Johnson & Johnson (NYSE:JNJ) is the world’s largest health care company. With a market capitalization of nearly $339 billion at the time of writing, it is one of the top 10 companies in an enviable group filled with technology stocks so big that even Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is only $20 billion away from them at $359 billion.

But is it still the same company that we have grown up with? And more importantly, why did Berkshire Hathaway dump the company after building to a position of about 1.56% of J&J’s stock and become the fourth largest shareholder?

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As you can see from Berkshire Hathaway’s 2007 13F filing, the holding was very close to 50 million shares, a huge position even for Buffett’s standards that was liquidated to zero in the next nine years. So why did Buffett, who we have all come to look up to in the investment world, dump a diversified, pharma/consumer health care/medical devices company?

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After a brief lull during the recent recession, JNJ picked up steam and increased its sales from $61.5 billion in 2010 to $70 billion in 2015. Clearly, Buffett dumped the company when it was actually steadily growing in sales. So it was never about revenue growth, but more about what the company was molding itself into.

A close look at their three segments reveals the transition of the company and more or less explains why Berkshire Hathaway chose to look the other way.

Segment Performances

Here is a quick review of how these three segments have grown over the 10-year period in question.

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All segments have shown growth, as is evident in the table above, but if you look closely you might notice that the pharma business has taken over the lead position, while medical devices and consumer healthcare now account for only 55% of their total sales. So JNJ is more or less a pharma company, with medical devices and a consumer health care division — not exactly the well-diversified company that it was in 2010.

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Medical devices are not doing well, although the company projects some growth starting at the end of this fiscal year. This weakness is not helping the top line for the past year and may slow their overall numbers if nothing changes.

Pharma, however, is a different ball game. Until about 2014, it was growing rapidly, mostly on the strength of its current drugs, which include Olysio/Sovriad, Rezolsta and a few others.

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However, I do not see this as a long-term problem because its Phase III is full of potential blockbusters.

And right there in the middle is its consumer segment, which has been on a gradual decline purely because it has divested so many losing brands and has not found ideal replacements for the revenue lost.

Diversified Versus Pharma-Heavy

Probably the biggest reason is JNJ is not as diversified as it was 10 years ago, as it kept pushing hard into the pharmaceutical business, which has become highly unpredictable due to the competitive landscape of the industry. That is also likely the reason Buffett, after holding several positions in top pharma companies such as Sanofi (NASDAQ:SNY) and GlaxoSmithKline(NYSE:GSK), now has an extremely small position in a sector that was long considered one of the most defensive due to the necessity of pharmaceutical drugs.

From an investment standpoint, Johnson & Johnson is still very much a solid company with steady dividend growth since 1972.

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Source: J&J

The real question is whether you want your money in what is increasingly becoming a pharma-heavy business rather than the well-diversified business it was a few years ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

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Comments

bigzoo
Bigzoo - 3 years ago    Report SPAM

I am not sure I see the point you are implying. In 2006 JNJ had the same structure of income - pharma accounted for 43% os sales - the same as in 2015.

However, your thought are interesting points to consider. Thanks.

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