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What do Motrin, Infant's Tylenol, Children's Tylenol, Tylenol Arthritis Pain caplets, Extra Strength Tylenol, Adult Tylenol caplets, Rolaids, grape-flavored Tylenol, Benadryl, St. Joseph's Aspirin, Zyrtec, Acuvue TruEye contact lenses, Mylanta, Invega, surgical sutures, insulin pump cartridges, Topamax, Eprex, Aveeno Baby Calming Comfort Lotion, Hemostatic Bone Putty, Hip Implants and Imodium have in common?

They have all been recalled by Johnson & Johnson (NYSE:JNJ) between 2009 and 2012 for everything from the relatively inconsequential (Motrin caplets dissolving too slowly) to the very serious (bacterial contamination in Infant's and Children's Tylenol).

Being a New York Jets fan and Rutgers alumnus, this puts me in something of a pickle, although no more than someone who relies on Johnson & Johnson as a source of fixed income. If you're a current JNJ shareholder and are unaware of the problems that have been plaguing the company, shame on you. It has been exhaustedly reported on, along with the overall impact.

The Good

The problem I'm having is that I'd like to hold onto my shares. Unfortunately, it doesn't take a Goldman Sachs (NYSE:GS) financial analyst to tell you that Johnson & Johnson isn't going to be your big moneymaker for 2012. Or 2013. Or 2014. It does have some things going for it however which could convince you to keep some or all of your holdings:

  • The share price seems to have bottomed (and actually gone up)
  • JNJ appears to be dedicated to remaining a dividend aristocrat
  • At this point, another two or ten recalls probably wouldn't make any difference (to the share price, not the bottom line); the damage is already done
  • This won't kill JNJ

For a young investor planning on holding the shares for a long time, the semi-fixed share price could be a good thing. Combined with increasing dividends, these few years have enabled higher than normal dividend reinvestment. In effect, the company has been in "buy low mode" for several years, which could pay off 10, 20, etc. years from now. This is actually an ideal situation for a buy-and-hold dividend investor.

For retired investors, holding might also be the best option. A retirement account may have a very high profit margin on the shares from superb historical performance, so selling would incur a large tax bill. With a fairly large 3.5+% dividend, it might be hard to find a suitable replacement, especially when factoring in the tax losses.

The Bad

On the other hand, the leadership situation has left me wondering whether this situation well end up going from bad to better or from bad to worse:

After CEO Bill Weldon stepped down, he was replaced by someone on the inside, Alex Gorsky. Typically, when there's a huge failure in leadership, it's a good decision to put someone in charge that isn't associated with that leadership. Ford Motor Co. (NYSE:F) noticed some problems in their company and instead of pulling up someone from the ranks, they got former Boeing Commercial Airplanes (NYSE:BA) CEO Alan Mulally to take charge. If you can believe me and the sales figures (excluding Europe, of course!), it seems to be working.

Alex Gorsky is no Alan Mulally. For those saying that he might yet prove himself, the fact remains that before becoming CEO of Johnson & Johnson, he was chairman of the medical devices and diagnostics group. Yes, the same group responsible for such stellar products as hip implants (recalled), Acuvue TruEye contact lenses (recalled), and insulin pump cartridges (recalled). If anything, the recalls are more as a result of him, being one step closer to the day to day operations, than Bill Weldon. And now he's responsible for the whole company. Oh, boy.

The Ugly

Leadership issues aside, I'm interpreting the dividend as a bit of a mess. I appreciate that JNJ has stayed the course of a dividend aristocrat. I'm sure retirees on fixed income appreciate it as well. I also think that the company is so diversified with so many different sources of income that this recall situation won't hurt the ability to sustain the dividend and the regular yield hikes.

That said, by stoically sticking to these dividend raises, I get the message that Johnson & Johnson is more concerned about the shareholder than the product. Freezing the dividend for a year or two would send a message that the company realizes that it has to get its act together. My logic is that the money saved from not increasing the dividend would either actually or symbolically go towards a huge overhaul in facilities, quality control, training and any other necessary expenditures. A company should put out good products, enabling a good dividend which attracts investors. Instead, the products are bad but Johnson & Johnson is still putting out that dividend.

The Sad Hill Cemetery Shootout (Conclusion)

I'm sure many people will disagree with that last point. Maybe with so many medical products failing, this dividend is the one way they have left of not hurting elder retirees, who've already had faulty hip implants replaced and the procedure completed using non sterile surgical sutures, only to find that the Extra Strength Tylenol they're using during recovery has a strange, musty odor. Either way, the situation is bad and the recovery won't be overnight. I've sold half my shares but I plan on keeping the rest. When Johnson & Johnson gets out of this mess, whether it's next year or next decade, they'll once again become the staple in every dividend investor's portfolio. Whether you can hold out long enough depends on your situation and what JNJ does to fix theirs.

Please tell me what you think in the comments section below! I appreciate hearing different opinions on the matter. I usually find the comments more informative than the research I did to write the article. Note: I thought a title involving A Fistful of Dollars or For a Few Dollars More might have sounded better, but I figured that people unfamiliar with the Dollar Trilogy would still recognize The Good, the Bad and the Ugly.

Source: The Good, The Bad And The Ugly: Johnson & Johnson