Retirement Strategy: A Focus On Johnson & Johnson For 'Team Alpha'

| About: Johnson & (JNJ)

If you have been following our "Team Alpha" portfolio series, you would already know that we are ahead by 24% as of our last update, crushing the S&P 500 by about 8%.

Our portfolio now consists of Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC), American Capital Agency (NASDAQ:AGNC), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), 3M Company (NYSE:MMM) and Bristol-Myers Squibb (NYSE:BMY).

Our position in Johnson & Johnson is roughly 7% of our total equity positions, and we are considering increasing this position by another 3% sooner than later.

Since I began writing about JNJ, I have been so accurate it's eerie. Take a fun look back at this article written almost one year ago. I think I am spot on this time also.

Facts And Fundamentals

Johnson & Johnson: Price: $68.99/share, Dividend Yield: 3.65%, ESS Rating: Bullish

  • An enterprise value of nearly $190 billion.
  • Operating margins over 25%.
  • $17 billion of total cash on hand.
  • A "comfortable" dividend payout ratio of 74%.
  • A dividend winner for 50 consecutive years of increasing dividend amounts, as well as an continual payments without missing any.

For these reasons alone, it is enough for us to have JNJ as an anchor for our portfolio, no matter what the temporary hiccups have been. Last quarter, JNJ dipped in revenues for YOY by a tad under 1% and earnings were squeezed by about 49%. The bearish argument is in those two numbers, as well as the recent abandoning of FDA approval for its new Alzheimer's drug as well as having a "tarnished" brand.

Repaving The Road For Success

Obviously as shareholders we need to keep an eye on these developments as they arise and take note of how JNJ addresses them. The longer term issues would be brand image and the new drug pipeline.

They are addressing these issues quite aggressively. The Alzhiemer's drug, while placed on the back burner by both JNJ and Pfizer, has taken on some new life recently. As noted here;

"Though trials for Pfizer and Johnson & Johnson's new Alzheimer's drug bapineuzumab were halted at the end of August for failing to slow cognitive decline, a new study has shown that the experimental drug could reduce physical damage in the brain."

This development could mean that both companies could once again jump headlong into getting FDA approval. The consensus is that it could potentially be a $20 billion market.

That alone would generate far more revenues than can be counted right now, and earnings would soar. Do not sell JNJ short on this issue. They have the resources to make this happen if it has any chance to happen.

"Many in the medical field believe that trial results so far have been weak. However, with positive results from upcoming trials, drugs that slow the progression of Alzheimer's disease could create a $20 billion market, according to Deutsche Bank analyst Barbara Ryan in a June note to clients."

So what about the brand? I am so glad you asked. As outlined here, the company is taking several, rather strong steps towards addressing this area, where it needs to be addressed.

"Johnson & Johnson is hiring a Bayer Group executive for a new position overseeing J&J's troubled consumer health and manufacturing operations, as new CEO Alex Gorsky tackles key problems at the health care giant.

It's the first big executive move by Gorsky, who became CEO in April and pledged to fix a host of quality, legal and ethical problems involving consumer and other products and sales practices.

New Brunswick, N.J.-based Johnson & Johnson said Thursday that Sandra E. Peterson, the chief executive of Bayer CropScience, will join J&J on Dec. 1."

This is the first time an "outsider" has been hired in such a huge capacity, and to me it makes perfect sense to have "fresh eyes" looking at this situation.

"She will be the first outsider ever appointed to the executive committee that manages J&J operations. The committee will expand from four to six members with the addition of Peterson and worldwide pharmaceuticals head Paul Stoffels, who now will add the role of chief scientific officer.

The expansion is meant to heighten J&J's focus on science and improve execution of its strategy, spokeswoman Carol Goodrich said."

Increasing this committee by 50% shows that JNJ is not only aware that dramatic changes need to be made, but are sending in more troops to make those changes happen.

Revenue and long term debt remained stable since 2009, however the great news for shareholders is that the dividends continued to increase, enterprise value increased, share price increased, and shareholder equity increased.

My Opinion

What more could a long term investor possibly want? Johnson & Johnson is a stock I would hold forever. Not just for those of us who are retired and are seeking income, but for just about any solid portfolio.

I think adding some additional shares at these prices will turn out just fine for us.

Disclosure: I am long JNJ, XOM, T, GE, AGNC, NLY, O, BAC, INTC, CSCO, WMT, MMM, BMY, KO, SO. 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.

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