Johnson & Johnson (JNJ 0.25%) is focusing on the next iteration of its business -- one that investors hope creates a lot more growth than in years past. The company spun off its consumer health business last year, and with just two main segments moving forward -- medical devices and innovative medicines -- J&J could be in a good position to accelerate its growth rate.
But investors don't appear to be convinced.
Year to date, the stock price is down 6.3% and has underperformed the S&P 500, which is up by 14.6% thus far. It's currently trading near its 52-week low, and it pays a fairly attractive dividend, which yields 3.3%. Is now a good time to buy this top healthcare stock?
The biggest obstacle for the stock remains its ongoing legal battle
There's no doubt that Johnson & Johnson has a strong, diverse business. But it's hard for investors to properly assess the stock and its suitability as an investment when there's a big cloud hanging over the company.
In May, J&J announced a third attempt at using a selective bankruptcy filing to help resolve issues relating to its talc lawsuits. The lawsuits involve claims that its talc-based products caused ovarian cancer in some people. The process has gone on for multiple years, and Johnson & Johnson has set up a subsidiary, LTL Management, intending to have the subsidiary assume the talc liabilities and bankrupt it, thereby limiting the main company's financial exposure.
In this latest attempt, Johnson & Johnson plans to separate the claims related to mesothelioma, and they won't be included in its $6.5 billion settlement plan. But with the vast majority of cases relating to ovarian cancer, the settlement can address nearly all the outstanding lawsuits.
If Johnson & Johnson is successful in finally putting this issue to rest, it will eliminate arguably the biggest risk and uncertainty facing the business today, which could help give the stock a boost. It's a development that investors should keep a close eye on, however, as the company has tried and failed before to resolve the lawsuits in this manner.
Johnson & Johnson is experiencing modest single-digit growth that's likely to continue
Johnson & Johnson isn't necessarily a company you should expect significant, double-digit growth from. It is, however, a stock that can make for a dependable investment that grows modestly over time.
In the first three months of 2024, the company reported $21.4 billion in sales, with the bulk of that ($13.6 billion) coming from its innovative medicine segment and the remainder from its MedTech business, which includes revenue from medical devices. Sales for the quarter were up 2.3%, which is fairly underwhelming, but that percentage rises to 3.9% when looking at operational growth (which excludes the impact of foreign exchange).
In the long run, the business expects to grow at a slightly higher rate. Management projects an annual operational growth rate between 5% and 7% from 2025 to 2030. The company expects to have more than 10 assets with the potential to generate at least $5 billion in peak annual sales.
Should you buy Johnson & Johnson stock today?
Johnson & Johnson as a company is chugging along, generating some decent growth numbers. Its stock trades at a modest 14 times its estimated future earnings (based on analyst estimates). Combined with its high dividend, it can make for an appealing value investment to buy and hold. But here's why I wouldn't invest in it.
Finding a company that's growing in the single digits isn't all that difficult. And many stocks that pay dividends can also generate modest growth. The dealbreaker is the legal mess the healthcare company continues to find itself in.
It's quite likely Johnson & Johnson will incur billions in litigation expenses and settlement costs for the next several years, and that's why investors may be better off steering clear of the company. Even if you want a dividend stock and a modestly growing business, there are simply much better options out there to consider. Johnson & Johnson's stock needs to be either a lot cheaper, or the business needs to be generating much more growth for it to be worth all the risks that come with its seemingly endless legal problems.
