Johnson & Johnson began as a small company that created surgical dressings in 1886. It has grown to become the largest, most resourceful healthcare company on earth. The company manufactures healthcare products for the pharmaceutical, consumer and medical devices markets. Johnson & Johnson has over 250 subsidiary companies that sell products in over 175 countries. It has increased its annual dividend for 58 consecutive years and is one of only two companies with a higher credit rating than the United States government. Shareholders have benefited from stable and consistent returns over the years.
A quarter of its sales come from products launched in the past five years; testament to Johnson & Johnson’s ability to innovate. It was the first company to release prescription contraceptives and invented the coronary stent. Will it be able to add yet another first to the list? Johnson & Johnson has committed over $1 billion to develop a COVID-19 vaccine and it is scheduled to advance to clinical trials by September. If all goes well, it could be available for emergency use early next year. The company is also revving up production capacity for such a vaccine, irrespective of whether they are the first to develop it.
Unfortunately, it is the company’s legal battles that have been making recent headlines. It has faced lawsuits relating to its role in the opioid crisis and talc baby powder products. The cost of litigation cut into about 6 percent of revenue during 2019 and 3 percent in 2018. Although not currently consequential, the risk is that these lawsuits get larger and materially impact its financials. The company has lost quite a number of lawsuits, although it has had many of the verdicts reduced or nullified on appeal. A potential agreement in principle to settle opioid litigation could likely remove an overhang on the share price.
Johnson & Johnson’s pharmaceutical segment represents half of its revenue. It is also its most profitable business and largest sales growth driver. The medicines focus on the therapeutic areas of immunology, neuroscience, cardiology and oncology. Its medical device segment sells a wide range of products including contact lenses, hip and knee replacement devices and surgical equipment. Well-known brands such as Listerine, Neutrogena, Savlon, Band-Aid and Clean & Clear are included in its consumer segment stable.
Johnson & Johnson will almost certainly remain a global force for years to come. It has a diverse business mix, with leading positions in various health markets. The company has the massive research and development infrastructure required to remain relevant over the long run. Its solid balance sheet and cash flow generation allow for further dividend growth, share repurchases and acquisitions. For these reasons Johnson & Johnson is a quality, defensive core holding in many investment portfolios.
Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.