Johnson & Johnson (ticker: JNJ) has largely lied low in an otherwise contentious year for large name-brand U.S.-based companies.
With big oil companies fighting falling prices, big auto and manufacturing firms answering to an “America First” populist in the White House, and health care companies treating the Obamacare exchanges like a vampire treats wolf bane, JNJ has largely — and quietly — gone about its business.
And business is booming for one of America’s most vaunted brands in the pharmaceutical sector.
Since Jan. 1, the quote for JNJ stock has risen from $113 to $136 per share, and is up 15.4 percent on a 52-week basis.
Yet some Wall Street analysts say JNJ is slowing to a pause, at best, and is facing a share decline, at worst, in the coming months. Eighteen analysts surveyed by The Financial Times peg JNJ’s 12-month share price at $132 per share, a slight decrease in the company’s current share price.
[See: 7 Pharma Stocks and the Prognosis for Profits.]
It could be that JNJ stock is just too pricey now, some experts say.
“Johnson & Johnson is a fantastic company, but JNJ is a very expensive stock at this point in time,” Tom Weary, chief investment officer at Lau Associates LLC, in Greenville, Delaware.
Weary describes Johnson & Johnson as a “very reliable company” with extremely steady growth in earnings and dividend yield. “The company is broadly diversified across health care with major divisions comprised of pharmaceuticals, medical devices and consumer products,” he says. “Johnson & Johnson is highly profitable, with pre-tax margins of 28 percent and a return on equity of 27 percent. The company also has a rock-solid balance sheet with a long-term debt to capital ratio of 25 percent.”
The challenge facing JNJ is that it is also a very large and slow-growing company, with 2016 revenues of $72 billion growing roughly 2 percent per year, Weary says. “Earnings growth is projected to average 6 percent per year, and increasing that rate is quite a challenge for a company its size,” he says. “That means acquisitions that make an impact have to be ever larger. For example, the company is currently acquiring Actelion for $30 billion. Yet large acquisition entails significant risk.”
Weary has an interesting comparison to make on Johnson & Johnson as an investment target. “With slow and steady earnings growth, the company’s stock could almost be viewed as a bond substitute,” he says. “Johnson & Johnson is a company which one wants to one for the long haul, but JNJ is a stock which an investor probably wants to add at a more favorable (lower) price.”
Professional investors, though, seem to approve of JNJ’s share performance, and expect more of the same value going forward.
[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]
“According to our fourth-quarter 2016 institutional stock ownership report, JNJ is a favorite among institutional investors investing in equities strategies,” says Mark Scott, a spokesperson for eVestment, a leading institutional investment data and analytics company. Scott says JNJ stock is No. 4 among the report’s top 20 most-owned stocks by institutional investors in the fourth quarter of 2016, the third quarter of 2016 and in the fourth quarter of 2015.
Additionally, in the fourth quarter of 2016, JNJ stock was included in 17.2 percent of portfolios. In the first quarter of 2017, the stock was included in 16.65 percent of institutional portfolios, down slightly from the end of 2016, the report notes.
“The data shows that institutional investors and their asset managers continue to be generally pleased with JNJ stock, which could impact its price (or keep it stable), since the institutional market is where big moves in stock buying and selling can impact a stock’s price,” Scott says.
One area where market investors could overlook a little underperformance is in dividend yield, and JNJ fits that bill, too.
“Johnson & Johnson is definitely a shining star as far as dividend payers go,” says Eric Ervin, CEO of Reality Shares, in San Diego. It is one of 50 companies that Reality Shares holds in its Divcon Leaders Dividend exchange-traded fund ( LEAD), which holds what the company believes is the healthiest dividend-paying stocks in the Standard & Poor’s 500 index.
Ervin notes that Johnson & Johnson has exhibited “stable and strong” free cash flow for years. “This year, JNJ’s free cash flow reached $16.8 billion, meaning the company has twice as much in free cash flow as it currently pays out in dividends, which is a very good sign,” he says.
In addition, the acquisition of Actelion, despite being slightly expensive, will help J&J “better manage pharma sales-growth pressures, boosting 2018 consensus revenue estimates by 3.4 percent to $80 billion,” Ervin says.
On the downside, J&J will have a variety of big drugs maturing, Ervin says. “There will be some pricing pressure from its biggest competitors as a result,” he says. “Plus, government regulations continue to put pressure on the entire industry.”
Overall, Ervin says the stock’s price-earnings ratio of 18 is higher than the company’s historical average and its peer group average. “The consensus 12-month price target is $130.47, meaning analysts believe the company is slightly overvalued at its current level,” he says. “We believe it is a long-term play.”
[Read: 4 Dividend Stocks That Will Make Your Portfolio Blossom.]
Add the fact that dividend-growing stocks have historically outperformed all other categories of stocks in the S&P 500, including dividend maintainers, non-dividend payers and dividend cutters, and J&J’s stock keeps some of its shine and luster heading into the second half of 2017 — just like it usually has over the years.
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Should I Buy Johnson & Johnson Stock? (JNJ) originally appeared on usnews.com
