Johnson & Johnson (JNJ +2.01%) is an iconic U.S. healthcare giant. It has changed over the years, but today its focus is on pharmaceuticals and medical devices. And it is an industry leader in both spaces. There are a lot of positives with J&J, as it is more commonly known on Wall Street, but there's one dark cloud that I can't ignore. And the shadow from that cloud is why I just can't justify buying Johnson & Johnson today.
Why Johnson & Johnson is a great company
When I look for stocks, I generally start with the dividend. And I don't look at the yield, instead focusing on the dividend growth streak. The longer a company has increased its dividend, the better, since only financially strong and well-run companies can hike the dividend year in and year out. J&J's streak is a huge 63 years, making it a Dividend King. I own a lot of Dividend Kings because I believe it is a clear indication that a business is well run.
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I also look at dividend yield. On that front, J&J's dividend yield is roughly 3.4% today. That's well above the S&P 500 index's 1.2% average yield and the average 1.7% in the healthcare sector. But, more to the point, it happens to be toward the high end of the historical yield range for Johnson & Johnson. That suggests this reliable dividend stock is not only offering an attractive yield, but it also looks attractively priced.
On the valuation front, more traditional valuation metrics clearly back up the value proposition. J&J's price-to-sales, price-to-earnings, and price-to-book value ratios are all below their five-year averages. I haven't discussed the actual business, and Johnson & Johnson already looks like a strong buy.
The business, meanwhile, just so happens to be one of the largest in the pharmaceutical and medical device spaces. J&J has the size and scale to invest heavily in research and development, regularly bringing out attractive new products. It has manufacturing, marketing, and distribution prowess that few can match. And it is generally a very well-respected supplier, so buyers are happy to work with Johnson & Johnson. And still I won't buy it and think that most others should avoid it, too.
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The wild card that I can't predict
The problem with Johnson & Johnson is that I just can't overlook its talcum powder products. Or, more precisely, the class action lawsuits involving its talcum powder products. Past users claimed that J&J's talcum powder causes cancer. J&J denies this and is fighting the civil claims in court. The lawsuit numbers and liabilities are huge, well into the thousands of claimants and billions of dollars. To put some figures on it, there are over 60,000 lawsuits against J&J, and it recently tried to settle the issue with a $10 billion class action settlement offer. The details of the offer didn't pass muster with the judge overseeing the case, and it was denied.
NYSE: JNJ
Key Data Points
My real issue, however, isn't just the potential cost. It is how uncertain the outcome is in what amounts to a super high-profile problem. If the class action case goes to a jury trial, there's no telling what happens, and the case could linger for years as both sides continue to fight, as they almost certainly will. And, worse, J&J can't discuss the problem with shareholders because it is a sensitive legal issue.
Johnson & Johnson isn't worth buying right now
I don't blame management for not talking about the details of the lawsuits. The legal decisions J&J makes have to be kept private. But, at the same time, investors are mostly left in the dark as to what the company is going to do and why. I don't mind owning companies facing hardship, and I think J&J will survive the legal headwinds it faces. But from experience, I know I don't want to own companies that aren't able to discuss in reasonable detail what they are doing about the hardships they face. So, I can't, in good conscience, suggest anyone buy Johnson & Johnson because I wouldn't buy the stock myself right now.
