Should You Still Buy Johnson & Johnson After Earnings Fall 56.7%?
In the last few months, I written two separate articles about Johnson & Johnson and why you should consider buying its stock to Depression Proof Your Portfolio.
Today I give an update after it released its latest earnings and answer – Should You Still Buy Johnson & Johnson After Earnings Fall 56.7%?
You can read the original articles in full at the links above.
But if you don’t want to; here’s a quick recap of why I said you should buy Johnson & Johnson to Depression Proof Your Portfolio.
From Article #1 Linked Above
Johnson & Johnson’s 2.7% Dividend
Over the last decade JNJ’s paid out a total of $28.82 per share in dividends.
At today’s share count of 2.671 billion shares that’s equal to $76.98 billion paid out to shareholders in the last decade.
Plus, in the last decade it grew its dividend 82.9% from $2.11 per share in 2010 to $3.86 per share now. This is an annual dividend growth rate on average of 8.3% per year.
And you should continue to count on these dividends for your retirement as well because Johnson & Johnson is one of only 29 “Dividend Kings” in the world.
A Dividend King is a stock that fits the following criteria…
- It’s a member of the S&P 500.
- The company has paid AND increased its dividend for 50+ years.
JNJ Earns Huge Profits
Over the last decade it earned an average operating income margin of 25.8% per year.
I look for anything above 10% on a consistent basis so JNJ surpasses this number.
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operation profit margins above 10% over long periods of time.
This makes JNJ a great operating business.
But it also means the company earns enough money from its operations to continue investing in the business for growth… Without having to issue debt or equity.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 21.3% per year on average.
JNJ surpasses my thresholds on both important metrics and that makes it an incredibly safe investment.
The Coronavirus Won’t Harm JNJ
Because of the mass unemployment caused economic issues we’re now dealing with people may stop paying these things if they need to.
But people won’t stop using Johnson & Johnson products to improve their health.
This was illustrated when JNJ released its most recent quarterly report on July 16th, 2020.
Revenue only fell 10.8% from the 2019 2nd quarter to the 2nd quarter of 2020.
And most of this was due to a fall in its medical devices segment when people were forced to put off elective surgeries due to the coronavirus.
With restrictions on elective surgeries in various cities and states lifting around the US, sales should pick back up in this segment.
And even with this, in the last 12 months JNJ has still produced $17.4 billion in free cash flow.
JNJ’s Low Debt
As of this writing its debt-to-equity ratio is 0.4.
I look to buy companies that have a debt to equity below 1.
Because the lower debt levels the company has, the lower chance it has of going bankrupt. And this makes it a safer investment.
JNJ Is Cheap
This is reason#5…
With the markets at or near all-time highs you’d expect a fantastic stock like JNJ to be selling at an enormous valuation.
But it’s not.
As of this writing its P/E is 26.2.
Its P/CF is 19.2.
And its forward P/E is 18.9.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This means, at its current valuations that JNJ is slightly undervalued to about fairly valued.
If you’re looking for a solid, safe, stable, dividend paying, cheap, and enormously profitable investment to Depression Proof Your Portfolio – consider investing in Dividend King Johnson & Johnson.
From Article #2 Linked Above
This thesis to buy Johnson & Johnson to Depression Proof Your Portfolio continued to play out after it released its most up to date quarterly financials on October 13th, 2020.
- Sales increased 1.7% in the year-to-year quarterly period to $21.1 billion.
- Earnings per share rose 101.5% in the year-to-year quarterly period to $1.33 per share.
- And JNJ increased its full year revenue guidance by $1 billion “driven by the strength of the recovery and strong underlying business fundamentals.”
It achieved this during the worst economy we’ve seen in almost 100 years.
This illustrates the power of its business… And why I recommended you buy it two months ago to Depression Proof Your Portfolio.
And it’s also why I’m once again recommending you buy its stock again today after its latest quarterly earnings release.
This thesis to buy Johnson & Johnson stock did not continue playing out after it released its most up to date quarterly earnings on January 26th 2021… Sort of.
- 4th quarter revenue grew 8.3% in the year-to-year quarterly period to $22.5 billion.
- Full year 2020 revenue grew 0.6% in the year-to-year period to $82.6 billion.
- But 4th quarter earnings per share fell a massive 56.7% in the year-to-year quarterly period to $1.74 billion.
- And full year 2020 earnings fell 2.7% in the year-to-year period to $14.7 billion.
What happened? Why did earnings fall so much? And is Johnson & Johnson still a buy?
Let’s hit these one by one.
What Happened and Why?
Due to the rapid and extreme onset of the coronavirus pandemic, Johnson & Johnson expenses rose in 2020.
It had about $800 million more in research and development expenses in 2020 at $4.03 billion than it did in 2019 at $3.23 billion.
This largely due to the research and development of its Covid vaccine.
And it also spent another $400 million in marketing and administrative expense this year than it did last year to promote the vaccine and its other products.
This would have caused a big drop by itself.
But it also had another $2.35 billion in expenses categorized as “other expenses” in its 4th quarter.
What are these?
Mostly, litigation expenses related to a lawsuit and $2.12 billion judgment against Johnson & Johnson.
The lawsuit alleged that asbestos in Johnson & Johnson baby powder caused thousands of women to get ovarian cancer.
The initial lawsuit and trial found JNJ guilty of liability in the case. And even though its still fighting these though appeals processes, in November 2020 the Missouri Supreme Court refused JNJ’s appeal.
Because of this, JNJ had to set aside $2.12 billion in a “reserve” fund to begin paying the more than 21,800 lawsuits associated with this settlement.
When a company sets aside a reserve that money is “charged” to the company’s income statement now… Even while appeals and settlement payments are paid out over time.
And charges lower earnings which is why they fell by 56.7% in the quarter.
Partly due to Covid… And partly due to this settlement.
Which gets us to…
Is Johnson & Johnson Still A Buy?
Yes, it is.
While the huge costs related to the creation and marketing of the vaccine will likely continue to some degree in 2021.
They won’t drastically harm its business or profits over the long term.
And while the settlement is worrisome on a human level of course with people getting cancer potentially from a Johnson & Johnson product – something they still vehemently refute – the charge is essentially a one-time fee that won’t harm its long-term business or profits and cash flows either.
To put this into some perspective… The $2.12 billion settlement amount while large, is only 5% of its $423.57 billion market cap.
Its only 10% of its typical $20 billion per year operating profit.
And its only 11.7% of its typical $18 billion per year free cash flow production.
This judgment will not harm its long-term operational ability… It won’t get rid of its long-term competitive advantages… And it won’t crush its profits or cash flow either.
In terms of the economics, look at this as a one time 10% hit to yearly profits and cash flows.
Not great. But it won’t break the business either.
For these reasons I continue to recommend you consider buying JNJ stock to Depression Proof Your Portfolio.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.