In the field of healthcare research and development, where innovation is not only important, but also sought after, Johnson & Johnson (NYSE:JNJ) has found a large market that could realistically never lose demand. As long as people get sick, Johnson & Johnson will have medicine to sell and products to develop that will help the sick.
Johnson & Johnson operates in three segments: consumer, pharmaceutical, and medical devices and diagnostics. Since Johnson & Johnson operates in these important markets, and because of the current state of its stock, I think Johnson & Johnson may be a good company to invest in.
While Johnson & Johnson's currently low stock price of about $62 allows for upside, it is also has an impressive record of paying, and raising its dividend for 49 straight years. Facing an extremely weak global economy over the past five years, Johnson & Johnson has more than doubled its dividend, and currently pays out about $2.40 per share - almost 4 percent. Most recently, Johnson & Johnson declared an increase in the quarterly dividend by 7 percent. This great record of dividends further hints at the long-term value of Johnson & Johnson to its investors.
On the other hand, some believe Johnson & Johnson may be paying out too much, and incurs costs that are too to retain its profit margins. With courtroom fines, litigation fees and drug scandals, like the excess chromium in certain capsules, a case could be made that the demand for Johnson & Johnson products is going to decline, leaving Johnson & Johnson in serious trouble. This is, of course, a point of worry if true. Dividends are welcomed, but if they decrease the health of the company at large, they become a risk rather than a reward.
Still, Johnson & Johnson has faced serious controversies in the past, and even when management did not handle the situation perfectly, Johnson & Johnson survived. Take it for what its worth, but I believe the 49 straight years of paying dividends and its history of providing the world with health care products speaks volumes more than the few potentially problematic situations Johnson & Johnson currently faces. I don't see these issues as reasons to get out of Johnson & Johnson stock.
A huge opportunity Johnson & Johnson may choose to capitalize on is to break up into three companies; they would be pharmaceuticals, consumer goods, and medical devices and diagnostics. Goldman Sachs (NYSE:GS) makes a compelling argument for why a break up, led by CEO Alex Gorsky, may lead to the highest returns for Johnson & Johnson.
Goldman Sachs makes note that each of these three companies would be a leader in its respective individual markets, based on sales and market share. Currently, the consumer and medical devices and diagnostics segments underperform their peer groups. Splitting these segments into companies would allow for each to have greater focus on operational excellence and may be able to achiever higher productivity levels. A successful split into three companies would undoubtedly lead to higher returns for investors - making it a great reason to invest in Johnson & Johnson before the break up occurs.
As mentioned, the nature of the healthcare industry allows for lots of innovation, and thus room for increased revenue and growth. Many pharmaceutical and medical device and diagnostic companies presented their most recent research and innovative products at the American Society of Clinical Oncology (OTC:ASCO) annual meeting.
Johnson & Johnson made one of the biggest showings, with its new prostate cancer pill. Zytiga, the new pill, is given as treatment along with chemotherapy, to patients with prostate cancer. The pill both lengthened the amount of time it took for the cancer to progress, and it also improved the survival in patients by 33%. This pill, once approved by the FDA, should bring in tons of revenue for Johnson & Johnson - leading once again to higher returns for shareholders.
These strong results from Zytiga are likely to have a positive spillover effect for Medivation's (NASDAQ:MDVN) prostate cancer pill MDV3100, which is similar, and possibly superior to Zytiga. Dendreon (NASDAQ:DNDN), however, seems to have lost big at ASCO. Its Provenge immunotherapy now has very serious competition from Johnson & Johnson and Medivation in the pre-chemo prostate cancer treatment. This competition may force Provenge into a niche position within the potentially lucrative market.
Bristol Myers Squibb (NYSE:BMY), one of Johnson & Johnson's major competitors, has come out of ASCO 2012 as the winner in pharmaceuticals. It has apparently made headway on a drug that will allow the immune system to locate cancerous cells and destroy them. If and when a company successfully finds the cure for cancer that doesn't essentially involve pumping poison into your body as chemotherapy does, it will bring in unforeseen levels of sales and revenue, leading to extreme levels of returns for shareholders.
Arguably the biggest loser coming out of ASCO this year, AEterna Zentaris (NASDAQ:AEZS), didn't even attend the annual meeting. However, it has continued to use shareholder money on perifosine - which is a drug that actually raised the risk of death in a colon cancer trial. As long as it keeps heading in the wrong direction, shareholders will be upset and it will be challenging to draw in new investments.
While Johnson & Johnson undoubtedly has some serious competition, especially within the pharmaceutical segment of its business, I do not foresee any of its competitors gaining so much ground that Johnson & Johnson shareholders will be left suffering. Johnson & Johnson has good market position in each of the segments in which it competes, and along with its currently low price per share and healthy dividend, I think Johnson & Johnson is one of the few good companies in the healthcare market to invest in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.