Reports have emerged claiming that Johnson & Johnson (JNJ, Financial), which is the world’s largest company in the health care sector, has been covering up the link between talcum powder and ovarian cancer for decades.
Talcum powder is a Johnson & Johnson product included in several of the company’s products. The company was marketing the product to low-income people, and after years of critique and denial it is now being claimed that Johnson & Johnson knew about the product’s links to ovarian cancer in women.
Talcum powder, commonly known as "baby powder," is a white powder primarily made up of the elements magnesium, silicon and oxygen. A finely ground talc powder helps to reduce friction and absorb moisture, which makes it useful for keeping the skin dry and preventing rashes.
According to the International Journal of Gynecological Cancer, frequent talcum powder use on the female genital area increases the risk of ovarian cancer between 30% and 60%. Thousands of women are believed to get ovarian cancer every year from using talcum powder, which makes it a risk to use the product.
However, the biggest shock is that regardless of such high-risk levels and having been aware of the potential side effects, Johnson & Johnson failed to warn users of such danger. Talcum powder has been in existence for the last 40 years, and people have been using it without fear of cancer-related consequences.
Nonetheless, following the recent revelations where a family of a Missouri woman triumphed against Johnson & Johnson in a $72 million civil suit, things could change going forward.
Johnson & Johnson could face several legal issues related to product liability in the near future as more victims continue to come forward. Johnson & Johnson’s case can be categorized as being negligent of product liability requirements, therefore, warranting victims to sue the company on the grounds of a defective product lawsuit.
Now, judging based on the numbers settled on the Missouri family civil suit, Johnson & Johnson could end up paying a lot of money in similar lawsuits if that takes precedence.
Large multinational companies take huge risks in marketing new products, which are expected to be used by billions of people. A defective product could result in catastrophic financial losses if the plaintiffs win the lawsuits.
A case in point is General Motors’ (GM, Financial) ongoing ignition switch lawsuits, which according to reports, could lead to $10 billion worth of financial losses in compensation and damages.
Should a Johnson & Johnson investor be worried?
If you take the figures at face value, then it would be right to worry about the potential lawsuits related to talcum powder products.
However, every legal suit is treated independently and based on the nature in which talcum powder is believed to cause ovarian cancer; it would be difficult to actually link any cases of ovarian cancer to the use of the talc powder.
In other words, the most realistic case would be a civil suit based on negligence, or omission of critical “buyer beware” information on the products.
This is probably why the $72 million settlement with the Missouri family was categorized as a civil suit.
In addition, while the company’s anticipation of potential lawsuits with regard to the recent developments on talcum powder could dent investors’ views on potential returns, its most recent quarter results can serve as motivation to buy the stock — if only for the short term.
Johnson & Johnson posted solid second quarter results with a massive growth in U.S. sales compared to the rest of the world while dividends continued to grow. The company has also been on an acquisition binge as it seeks to bring more value additive components to its portfolio of products.
U.S. sales were up 7.4% with the overall growth rate coming at 3.9% year over year. The company also revised its expectation on sales for the year 2016 to about $72 billion from an earlier estimate of about $69 billion while EPS is now expected to come at about $6.63 to $6.73 compared to first-quarter guidance of $6.53 to $6.68.
And as the company continues to explore more growth opportunities, it has now added Vogue International LLC to its growing range of acquisitions.
The company’s chairman and CEO tooted the move by saying that whenever Johnson & Johnson is “looking at inorganic growth opportunities, we look at tuck-ins, we look at mid-size deals. We'll look at large deals. But we're going to be very disciplined. We're going to be very decisive about how we do it and ultimately try to better serve patients and consumers.”
Conclusion
For now, Johnson & Johnson appears to be expensively priced given its high P/E ratio of 23x, but it still stands out as a very good stock for dividend investors.
Johnson & Johnson has a dividend yield of 2.56% and at a payout rate of about 54%. This means that there is room for continuous dividend growth in the coming years before it hits the optimal payout level of 60% to 70%.
Disclosure: I have no position in any stock mentioned in this article.
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