5 reasons J&J is the perfect investment

Growth, stability, income -- what's not to like about this stock?

By InvestorPlace May 9, 2014 1:17PM

Credit: © John Raoux/AP

Caption: Johnson & Johnson productsBy Jeff Reeves

Johnson & Johnson (JNJ) fell out of favor among defensive dividend stock investors over the last year.

The company suffered from quality control issues and the stock didn't go much of anywhere from mid-2009 to mid-2012 -- even as the broader market went on a tear.

However, CEO Alex Gorsky took over two years ago and has helped lead the company back to growth. The stock has been marching steadily higher, up almost 60 percent since Gorsky took over versus 35 percent or so for the Standard & Poor's 500 Index ($INX).

That includes an impressive 9 percent gain year-to-date despite a pretty flat market.

To me, this recent strength makes Johnson & Johnson stock the rate combination of growth and rock-solid stability.

Here's why the stock is the perfect investment right now for any portfolio:

Stability: JNJ stock is a health care play, which means rock-solid stability even in times of trouble. After all, folks will cut back on just about anything before they stop getting treatment that makes them live longer more productive lives. Additionally, Johnson & Johnson is also a consumer staples play thanks to its very popular brands, including Band-Aid, Tylenol and even Splenda. It's a one-two punch that should be very attractive to those seeking low-risk investments.
Revenues are bouncing back: Of course, the knock on staples or health care companies is that they are sleepy. But JNJ has bucked this trend with great revenue growth recently. In fiscal 2012, Johnson & Johnson posted revenue of about $67.2 billion. Last year it was $71.3 billion for a decent 6 percent top-line growth rate, and projections are for another 5 percent in growth this year to about $75 billion in sales.

That's not burning down the house, but it's certainly encouraging given the stagnant top line at many other defensive players right now. Seven straight quarters of year-over-year revenue growth means all that much more in an environment like this.

Dependable dividends: On top of this stability and growth, investors in Johnson & Johnson can depend on regular dividend payments that grow over time. The stock has paid dividends consecutively since 1944. Furthermore, distributions that have increased 145 percent from 28.5 cents per share each quarter in 2004 to 70 cents per share currently. And with current Johnson & Johnson dividends at about half of earnings, those payments are not just sustainable but also prepped for further increases as the company continues to grow.

The stock is fairly valued: While naysayers may point out that Johnson & Johnson could be overvalued after this run, it's still trading for about 15.5 times future earnings -- which is exactly the forward P/E of the broader market right now.

Furthermore, compare JNJ stock with a company like Merck (MRK) or GlaxoSmithKline (GSK) and you'll see a similar forward P/E of between 15 and 16. I won't claim that after a big run you're going to make a bargain buy here, but you can have confidence that JNJ stock isn't overbought and due to crash. At worst, it's fairly valued.

Buybacks and cash: If all that isn't enough, Johnson & Johnson executed a mammoth $12.9 billion in buybacks across 2012. That pace has decelerated, with "only" $3.5 billion across fiscal 2013, with a mere half million dollars in stock buybacks across Q4 2013, according to the company's annual report. Still, that kind of commitment to returning capital to shareholder is noteworthy. Also noteworthy is that with nearly $30 billion in cash and short-term investments on the books, JNJ has plenty of dry powder for more efforts like this going forward.

More from InvestorPlace

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities.

May 9, 2014 5:36PM
Are they back or did they just put a band-aid fix on it?
May 11, 2014 11:07AM

Jeff Reeves... like MOST inherited business platforms today, they do not contain ANY enterprise and native salespeople. Feel free to invest in these junk-entities chock full of administrators, degrees and alumni, but without street-culture, they just play paper and financial wrangling games until death comes.

When the world hears that businesses with be enterprises... and not governments, conquerors, banks and conglomerate pariah... there will be investing again. What good are Board Directors all popped out of the same molds? What good are degrees without validation or warranty? What good are people in entities who are more corrupt bureaucrat than entrepreneur? It's all garbage, Jim, just like ALL of your so-called articles. Just hollow spew because somebody pays you to write dung.

May 10, 2014 4:10PM
Who's on drugs more the CEO or writer of this article. They still have big issues to solve
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