The big banks are not the only target for those who see a need to break up the nation's largest institutions. Johnson & Johnson (NYSE:JNJ) came under fire recently by Jami Rubin, an analyst at Goldman Sachs, who sees more value locked inside the conglomerate than the stock commands in today's market.
According to him the "sum of the parts" analysis points to a company worth as much as $120 per share, his new price target. Based on his analysis the consumer portion of the business alone is estimated to be worth as much as $17 per share. His reasoning is that as one of the company's top performing segments, with plenty of room for margin expansion, it stands to gain value on multiple expansion not possible for the parent company.
Other options presented by Mr. Rubin are a spin-off of the Medical Devices and Diagnostic unit, or a leveraged share buyback, both of which are viewed as paths to unlocking shareholder value. The analyst frowned on the idea that any more mergers or acquisitions would do anything more than depress value further.
What does this actually mean for investors... not much really. Although a few analysts may see the need for the company to break up there is no indication from management that it is even a consideration at this time. Based on comments in the last earnings report (Fiscal 2015) it looks to me like the company is focused on business as usual, even in the face of slowing worldwide sales (down -5.7% in 2015). US sales growth in 2015 was tepid at best, about 2.6%, and more than offset by a double digit decline in the international market (-13.1%).
"As we enter 2016, our core business is very healthy, and the recent decisive actions we've taken in support of each of our businesses position us well to drive sustainable long-term growth, faster than the markets we compete in."
What investors should be concerned with is the impact of currency conversions, growing competition and the prospect of additional acquisitions. . . not to mention the shaky footing on which the Un-Affordable Care Act now stands. Currency conversion resulted in a -14.2% hit to international sales in 2015 and will likely produce a similar impact in 2016. Although the dollar has weakened somewhat in the past month, alleviating some of that concern, the move is likely to reverse as US economic data and FOMC indications point to another rate hike in the calendar 2nd quarter. As for the ACA, if we get a republican in the White House we can kiss away any tailwinds it may be providing.
The upshot is that the company is one of the most stable on the international market. It has produced more than 3 decades of revenue growth, despite slowing global sales, and has a longer history of dividend increases. The company is well known for raising the distribution every spring, typically in April, and there is little expectations that will end this year. At the current rate the stock pays $3.00 annually, about 2.79%.
While I find it unlikely that JNJ will break itself up to please the analysts, it is very possible that the stock will reach new price targets near $120 simply due to a dividend increase.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.