Johnson & Johnson: This High-Growth Stock Is A Strong Buy (NYSE:JNJ) (2024)

Johnson & Johnson (NYSE:JNJ) is an ideal investment choice for risk-averse market participants, looking toward growth and profitability. JNJ's strong financial fundamentals and its market position make it a highly secure option, with its diversified segments that result in a minimized risk exposure for the company. I believe the stock is a strong buy, especially for investors seeking stability through a financially sustainable business model.

Company Overview

Johnson & Johnson is a global healthcare giant, with a market capitalization hovering close to half a trillion dollars. Its market operations are trifurcated into the domains of pharmaceutical, consumer health, and the medical devices segment. The company is a clear healthcare leader in all three segments and continues to innovate and excel above competitors' strategic initiatives throughout the market. In the secondary financial markets, the JNJ stock holds strong credibility, given its perpetual bullish rise since its trade initiation in 1982, and its inclusion in the renowned Dow Jones Industrial Average (DJI). Johnson & Johnson, along with Microsoft (MSFT) is the only American company with a AAA credit rating, making its probability to default even lower than that of the US government.

JNJ Price Movements amidst Global Shockwaves

Looking at JNJ's broader five-year price movements from 2017 to 2022, a persistent bullish trend of 46% growth can be observed that has continued despite the slowdowns following brief dips. The stock delivers consistent growth and recovers despite serious dips. In early 2020, JNJ, along with other major stocks tanked during the Covid-19 outbreak but had steadily recovered in the weeks that had followed, which was in part due to the company being a healthcare provider amidst a global pandemic. Looking at the trend throughout 2021, a substantial climb of 11.4% had been maintained. This was a result of the company's developed Covid-19 vaccine and booster shots that were approved by the CDC.

Similarly, March 2022 did not bring any disruption to the JNJ growth path, amidst the Ukraine-Russian crisis, which saw several industries impacted, as a result of the supply chain and logistical disruptions that had come about. In a joint statement, healthcare executives, including representatives from Johnson & Johnson, stated that the ensuing economic sanctions against Belarus and Russia would not impact revenue, but may potentially delay clinical trials. Towards the end of March 2022, the company announced its plans to end sales of personal care products in the Russian markets.

Financial Performance During Fiscal 2021

During the fourth quarter of 2021, Johnson & Johnson reported a revenue figure of almost $25 billion, which translated into an EPS of $2.13 per share. In comparison to the fourth quarter of 2020, sales had seen a 10% growth by 2021, and net income had gone up nearly 15%. Looking at the results for 2021 entirely, revenue was at $94 billion, up 14% from the prior year's figure. Similarly, the adjusted profit per share was calculated as being $9.80 per share, which the company expects to rise to $10.60 per share during 2022.

This stellar performance was owed to global demand for the Covid-19 vaccine, which alone contributed $1.62 billion to the sales figure. As per comments by the management, a further revenue of up to $3.5 billion in Covid vaccine sales is expected throughout 2022, as more markets are tapped into. With the developing markets gradually increasing their supply of Covid-19 vaccinations, so too does JNJ's profitability potential increase.

Comparing each of Johnson & Johnson's primary segments, its most significant gain came in the medical devices segment, which had grown annually by over 18%. This was followed by its pharmaceutical sales which had risen by 14%, and finally, healthcare product sales which rose by 4%. Moreover, the company's previous track record in financial performance indicates a stellar trend in which investors have consistently shown strong confidence. This can be reflected in the revenue the company has reported in the previous 7 years, with a clear and consistent growth trend.

Competitive Analysis

Given the nature of Johnson & Johnson's business model, the company's various product lines, through its various subsidiaries, all face local and international competition. The company discloses in its 2021 annual report that its most significant area of competition has been researching new products. The healthcare domain, in general, is highly dynamic with innovative product lines being launched regularly, and Johnson & Johnson, therefore, requires constant development to maintain its edge above the market. Furthermore, its management recognizes that disruptive innovation is something that could impact the sustainability of the company, which is why the company increasingly allocates a substantial investment amount to research and development on an annual basis. The research and development costs from 2014 to 2021 can be visualized in the graph below:

Taking a look at the wider competitive realm of healthcare players that are similarly sized as mega-companies, we see that JNJ has the largest market capitalization in the entire healthcare industry, amongst comparable firms. In this respect, it is the largest amongst its direct competitors, which fundamentally eases its ability to raise finances. The JNJ stock is also priced the highest, as of April 2022.

Data exported from Finviz.com

Similarly, its EPS of $7.8 per share stands the highest, far more substantial than the figures reported by Pfizer (PFE) and AstraZeneca (AZN). This in large part explains the stock's high price, as investors deem it as being more valuable than comparable stocks, as a result of its ability to generate comparatively higher earnings. This is reinforced by its substantially lower P/E ratio than other stocks, with only Pfizer having a lower figure in this metric. The stock is perceived as being relatively undervalued, owing to its lower P/E ratio, with further growth anticipated to be realized.

Although it may seem concerning to market participants, JNJ reported a substantially low figure for sales growth in the prior five years, this should not present a red flag for potential investors. For one, this low rate of 5.5% is attributable to the diversified nature of the company, which includes the high-growth pharmaceutical domain, as well as the low-growth consumer healthcare product segment. This diversification, although reducing sales growth, ensures risk minimization, which is why the company has amongst the lowest short floats in the competitive landscape.

JNJ a Favorite Amongst Dividend Seekers

One reason that market participants hold a favorable view of the JNJ stock is due to its status as being a safe dividend-generating stock within the market. The stability of Johnson & Johnson's business operation can be determined by its track record of paying out dividends to its shareholders since 1963.

The graphs above indicate a steady increase in both the JNJ stock prices as well as the dividend payout on an annual basis. This steady progression indicates increasing earnings per share for the stock, with which it is capable of delivering increased value to its shareholders in the form of dividends every quarter.

Similarly, JNJ's dividend yield as of the final 2021 quarter stood at 2.57%, which is considerably higher than the comparable average for S&P 500 stocks of 1.27%. The stock, therefore, is a clear winner in terms of dividend yield, generating enough value to retain for growth initiatives, as well as for-profit distribution amongst its shareholders.

What Makes JNJ Such a Safe Investment?

With a short float of 0.59% and institutional ownership of 70.30%, the JNJ has the fundamentals of being a good bet in the market, indicating confidence amongst investors. In comparison, the stock fares slightly better than another industrial big player, Pfizer, which has a short float of 1.09% and institutional ownership of 68.30%. I believe this is in part because of Johnson & Johnson being perceived as a far safer investment choice, given its diversified and segmented business model which substantially reduces its level of risk exposure, a feature that is attractive for institutional investors that are typically risk-averse.

Johnson & Johnson is only one of two American companies that hold the AAA credit rating, which is one grade above the US government itself. In essence, the market has a stronger sense of certainty in terms of debt repayment with JNJ, as opposed to the US government, an entity that is authorized to print money. This is a statement in itself which points to the credibility the company holds across the global financial sectors. The company has capitalized on this strength, maintaining a steady debt-to-equity ratio which stands at 0.46, as of April 2022. In comparison, Pfizer has a D/E ratio of 0.50, which makes it slightly riskier in terms of credit exposure.

One reason why JNJ enjoys the level of financial success and credibility described above is due to the nature of the market it serves, which could be described as one that is highly defensive. Medication and healthcare services are typically price-inelastic, which means, consumers will continue buying despite price shifts and macroeconomic disruptions. Moreover, the strategic focus it has allocated to each of its divisions further enhances its image as a high-growth company with a diversified business model. JNJ's consumer health products segment, which held the lowest growth rate of 4% in the earnings reports of 2021, gives the company advantageous pricing power and a stable cash flow, which makes it less risky than an exclusively pharmaceutical company such as Pfizer. This can be demonstrated in the two companies' revenue charts plotted below:

Johnson & Johnson's pharmaceutical segment, although uncertain in the long term, has proven most profitable, delivering the highest revenue share of $52.1 billion, which indicates the level of value addition. Finally, the medical device segment, which delivered an impressive $27.1 billion in revenue for 2021, holds the most potential as healthcare systems modernize in the post-Covid context. This segment also held the highest annual growth rate of 18% against 2020.

Short-Term Liquidity Concerns

Despite the clear strengths the JNJ stock holds, there appear to be specific areas about its fundamentals that understandably raise the eyebrows of potential investors looking to include the stock within their portfolios. Understanding these risks can give better insight as to how a portfolio that is inclusive of JNJ can be better diversified to minimize overall risk exposure.

One area that may be particularly noteworthy could be its short-term liquidity shifts over the years, which can best be understood by visualizing the company's quick ratio trends since 2016:

Although the company had a substantially safer short-term liquidity position during 2016, this saw a shift from 2017 onwards, which had carried through beyond 2021. There is a clear indication of the company reducing its safety cushion about its short-term obligations and instead has opted for an approach that keeps it barely above its immediate payments. However, the quick ratio for JNJ does not ever drop below 1.0, indicating the company has never compromised upon its ability to manage present obligations.

The reduction in the quick ratio to a figure closer to 1.0 indicates the strength of its inventory as a means of generating revenue. Given the demand for its healthcare products, as well as the marketing strategy, Johnson & Johnson can safely rely upon its inventory to generate sufficient liquid cash and equivalents to safely pay off short-term liabilities. The risk involved with this approach is that a decline in demand could prove costly to the company if ever it is unable to sell off its inventory. However, given its diverse product lines, as well as the inelastic nature of healthcare demand, the probability of this risk remains minimalistic.

Conclusion

In a world of uncertainty and gambles in the ever-shifting trends of the stock market, a secure investment option for risk-averse market participants is the JNJ stock. Given the nature of the healthcare sector, which is highly defensive amidst financial crises, and the inelastic nature of healthcare demand, the stock has survived some of the most severe macroeconomic shocks. Its financial performance demonstrates persistent and stable growth, which has a minimized risk exposure due to its diversified nature. As a result, the firm stands markedly above competitors in the market and is perceived as being a safe dividend provider, given its track record. JNJ is a stock that no investor will regret including within their portfolio.

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