Berko: Johnson & Johnson still valuable
Friday, April 12, 2013 7:00 AM
Dear Mr. Berko:
In April 2005, I bought 140 shares of Johnson & Johnson at $72 (including commission). It’s now $82; in the past eight years, it’s gained only 8 points. I guess I should be glad I don’t have a loss. The company’s revenues, earnings and dividends (everything you consider important) have increased every year, so that 10-point, or 11 percent, increase is disappointing. My other stocks have done much better, and they don’t have Johnson & Johnson’s great long-term record. Should I continue to hold my shares, or should I sell them? Do you still like the stock?
L.R., Jonesboro, Ark.
Since I was a kid, I’ve always admired Johnson & Johnson (JNJ-$82.02). JNJ, a Norman Rockwell icon, was founded in 1886, the year Apache chief Geronimo surrendered to the U.S. Army. With 2012 revenues of $70 billion, JNJ has put a cornucopia of superb personal care products, household products, medical devices and pharmaceuticals on the shelves of most of the world’s convenience stores, supermarkets, drugstores, newsstands, pharmacies, surgery and trauma centers, and hospital emergency rooms. JNJ, with its AAA credit rating, is a revered leader in the health care industry. It generates enormous free cash flow (the difference between operating cash flow and capital expenditures) and has a hugely diverse revenue base, a prolific research pipeline and a nearly unbridgeable economic moat. And except for Coca-Cola and Nike, few companies can match JNJ’s product acceptance, its esteemed reputation and its 40-plus years of consecutive revenue, earnings and dividend growth.
Why would a company with such impressive revenue, earnings and dividends (and expecting similar growth in the foreseeable future) perform so languidly? Some suggest that product recalls in JNJ’s over-the-counter business (Motrin, Tylenol, Aveeno, etc.) damaged JNJ’s impeccable brand image. Some believe that the huge volume of legal actions, related to JNJ’s hip and knee replacements and 28 other products that have been recalled since 2009, are creating major management distractions. Others believe that these recalls suggest ongoing problems with quality control. Meanwhile, governments from developing countries (45 percent of JNJ revenues are overseas) have learned to combine resources to secure price cuts (plus bribes) for health care products they purchase.
But concerning to me is JNJ’s nebulous $26 per share book value, which includes a high level of intangible and goodwill values. A certified public accountant who gets his jollies dissecting financial statements tells me that $45 million to $50 million of JNJ’s assets don’t meet his “see it, taste it, touch it and smell it” test. On a bad day, this could reduce JNJ’s book value by $7 a share. But every company has problems, which is why good management – and too often bad management – gets the big bucks.
The aforementioned factors can be a drag on a company’s share performance. But JNJ’s insouciant stock performance is more a function of hedge fund greed, momentum sharks, investment banksters, leveraged buyout bums and Wall Street dealmakers to whom quality and dependability have no importance. Do you wonder how the Dow Jones industrial average can make new highs as the economies of Europe and Asia struggle and U.S. fiscal and monetary policy continues to fail? Wall Streeters, emulating Congress, have morphed into greed-seeking missiles. The long term and quality are useless concepts for these greed eaters, who prefer making a fast $5 rather than a slow $20. So while the Federal Reserve continues to feed $85 billion a month into the banking system, short-term performance will rule the roost. Greed eaters make it while it’s hot. When the Fed stops feeding $85 billion every month to the banks, the action will dry up, and concepts such as long term and quality will become the new normal again.
Don’t sell your JNJ. However, if you do sell JNJ, I can almost guarantee that about three months after you deposit the proceeds, those shares will run to $106 or higher and split 2-for-1 and the board of directors will raise the dividend by 25 percent. Please let me know when you sell the stock.
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