Johnson & Johnson has beaten the consensus by an average of 3.8% each of the last four quarters. No doubt, there are those that will trade JNJ pre- and post-earnings. The quarter has been generally strong, with three big approvals including: Zytiga, shown to extend life for prostate cancer patients; Edurant, an HIV virus reproduction blocker; and Xarelto, for blood clot prevention. The company had four product recalls during the quarter, all related to a chemical smell linked to shipping pallets. Standard and Poor’s has a one-year price target of $73, an 8.2% increase over Friday’s close.
When I think of Johnson & Johnson though, I don’t think of trading and fast money. I think of the 3.4% dividend yield and the 54.2% return over the last ten years versus the 13.4% return for the S&P500. I think of the company’s volatility compared to the S&P500 index (SPY) during 2008, 29.8% and 41.3% respectively, and diversifying correlation of .8 with the index when many other correlations were approaching one.
The stock has lagged the Healthcare Select SPDR (XLV) by about 7% over the last year, principally due to three recalls in November of 2010. The company’s diversified revenue stream; drugs, consumer products, and medical devices helped it to produce $14 billion in free cash flow in 2010.
For those that choose to select individual stocks rather than indexing, Johnson & Johnson is a must to construct a prudent portfolio. The lower correlation and steady returns will provide risk-adjusted returns and allow you to sleep at night. At a P/E of 14, it’s not the most inexpensive of the megacaps, but the almost $27 billion cash on the balance sheet means the company has 14.8% of its capitalization for acquisitions and R&D. The company spent $6.8 billion in R&D in 2010 and has 22 drugs in late stage development, including 11 in phase three. The significant cash balance gives it the ability to ramp up R&D or continue its aggressive acquisition strategy.
Pharmaceuticals and medical devices account for 36% and 40% of 2010 sales which should serve the company well given demographics in its largest markets. The consumer products division accounts for 24% of sales and includes so many popular products, some are almost guaranteed to be in your medicine cabinet right now. The acquisition of Pfizer’s (PFE) consumer products division in 2006 cements its position in the industry.
The investment provides a valuable diversification internationally as well. International sales accounted for 52% of total during 2010. The first-quarter earnings report shows an increase in international sales of 7.3 percent. The company reported a positive currency impact of 3.2 percent as well, which should continue given dollar weakness.
Last week, the company closed its $245 million acquisition of a cold medicine producer in Russia. The company has also made significant inroads in Asia through a recently opened plant in Suzhou, China.
Significant weakness in the first quarter resulted from a consent decree signed with the US Food and Drug Administration to govern the McNeil division manufacturing operations. The decree was signed in response to the four product recalls from the Pennsylvania plant and gives the government additional oversight at the factory.
Johnson & Johnson will not make you spectacularly rich, but neither will it make you broke. It will give you exposure to the fast-growing drug industry with more stable returns given its exposure to consumer products, and the dividend yield provides a stable cash return on the investment. Make it a staple of your core portfolio.