A Look Back at Johnson & Johnson

A pharmaceutical giant under fire

It’s been over a year now since I wrote my thesis on JNJ 0.00%↑ Johnson & Johnson, a Dividend King that has paid increasing dividends for 60 years!

The company has been one of my oldest positions, and I have been a happy shareholder since I bought my first shares for $126.6 each in the depths of the Covid Crash (I purchased on the 12th of March, just a week before the market bottomed).

It’s now time to look back at the company, and see if what I expected would happen, has happened, and whether I should continue to own this business going forward.

If you’d like to read my original thesis, you can check it out here:

Johnson & Johnson

Let’s get started.

The Thesis

The first thing we need to take into consideration is to see what I thought about the company, and what my thesis for the investment was:

• The Spin-off will help unlock value in both key areas of the new companies (Consumer Health and Pharmaceuticals)

• The companies business is fundamentally stable and sound

• The R&D Pipeline is strong and will continue providing new and innovative products in the coming years

• The dividend and share buybacks will continue to increase at acceptable rates

• The Pharmaceutical side of the business will continue to be the growth driver

• The Consumer Health side of the business is a mild “turn-around” story that can focus on cost control and branding power to reinvent itself.

• The judicial issues will be resolved without a significant drag on financial performance.

How has this held up?

Let’s take it point by point:

Well the spin-off hasn’t happened yet, and the latest update from the company’s Annual Report indicates that it is expected to happen by the end of 2023.

In November 2021, the Company announced its intention to separate the Company’s Consumer Health business (Kenvue as the name for the planned New Consumer Health Company), with the intention to create a new, publicly traded company by the end of the fiscal year 2023.

Regardless, this is a very long term statement, and we won’t find out whether it was the case or not for another 10 years or so.

Personally I’m not a fan of the name “Kenvue”.

This hasn’t really changed over the past year.

Long term debt has slightly decreased due to an increase in current loans and notes payable, but overall the balance sheet looks to be as solid as ever.

The companies revenue has increased and substantially all of the inflation we have been seeing over the past year has been passed on to its clients. Net earnings are slightly down, but thats because of an unusually high amount of income taxes.

Operating cashflow is slightly down, as is free cashflow, but still enough to pay out its increasing dividends.

I’m not a doctor, but this is looking to be on track:

Well they have essentially doubled their share buybacks while increasing their dividends!

Personally I don’t actually like this.

The company is quite pricy and is trading at a 23 PE ratio, so buying back shares at this valuation is like investing in something that will provide them a 4.3% yield.

Given that the current risk free rate is around this level I’d prefer it if they were to just payback some debt, or bought some treasuries.

This has continued to be the case, with the companies pharmaceutical sector accounting for substantially all of the growth in revenue over the past year.

No spin-off yet, so nothing to turn-around yet.

Well, this didn’t turn out as I expected.

While this doesn’t necessarily bypass the Limited Liability of the subsidiary, it’s still an issue since it will result in additional costs to defend themselves from these lawsuits.

Hopefully the original case will go well, and the company will not need to spend too much money defending themselves.

The future

Overall the company has turned out about what I expected, except for that little hiccup with the court cases.

I’m not concerned with the company’s ability to continue to do business and generate cashflow and earnings.

The problem is, yet again, the valuation.

Using my new “Simple Valuation” method I get a value of $78 per share, which is pretty reasonable and would imply a PE around 11. That would put its earnings yield at around 8.5%, which feels like a reasonable premium over the current risk-free rate.

Unfortunately the company is trading at $154 which is substantially higher than I am confortable buying at.

For now, I’ll just be receiving the dividends and allocation any free capital elsewhere. Regardless, the company is doing fine, so I don’t want to sell.

Current Stance: HOLD

What about you? Where do you stand on JNJ 0.00%↑ ?