Case Study: Johnson & Johnson (JNJ) stock according to high performing analysts
Key Points
Performance
Johnson & Johnson shares rose by 6.87% this week. Even after this rally, JNJ is down by 7.32% on a year-to-date basis. This compares poorly to the S&P 500, which is up by 7.34% on a year-to-date basis thus far. Yet, the credible analysts that Nobias tracks see double digit upside potential ahead.
Event & Impact
Johnson & Johnson has been dealing with legal issues regarding its talcum powder sales; the company continues to face civil lawsuits that have the potential to cost it billions of dollars. This headwind continues to weigh on shares.
Noteworthy News:
This week, JNJ announced an $8.9 billion settlement offer in an attempt to resolve thousands of lawsuits. Wall Street analysts noted that this figure was less than expected.
Nobias Insights
62% of recent articles published by credible authors focused on JNJ shares offer a “Bullish” bias. Three out of six credible Wall Street analysts covering Johnson & Johnson believe shares are likely to fall in value. The average price target applied to JNJ shares by these credible analysts is $190.40, implying upside potential of 15.3% relative to the stock’s current share price of $165.15.
Bullish Take Wells Fargo analyst Larry Biegelsen, who carries a Nobias 4-star rating, published a report this week which stated, “The firm left the call "confident" that the updated plan is "reasonable" and should ultimately allow for the situation to be resolved.”
Bearish Take Hunting Alpha, a Nobias 4-star rated author, stated, “JNJ has been subject to over 40,000 lawsuits over its talcum baby powder product over the last decade. According to Neal Katyal, the legal liabilities are estimated to be as much as $61 billion, which would eat up more than the last 3 years of the company's free cash flows.”
JNJ Apr 2023
Johnson & Johnson (JNJ) has become known as a low beta, defensive healthcare stock that investors have flocked to during volatile market periods for decades. This company is a dividend aristocrat with a 60-year streak of dividend increases.
J&J currently has a $431.6 billion market capitalization. Although this company is often considered an income oriented stock, Johnson and Johnson has generated a significant amount of wealth for long-term shareholders.
Over the last 30 years, JNJ shares have risen by more than 1,550%. And, that’s just price gains. It doesn’t factor in all of the dividends that shareholders have received over the years. But, despite the stock’s illustrious history, JNJ shares have struggled throughout 2023. They’re down by 7.32% on a year-to-date basis. This is largely due to looming legal headwinds that the company faces due to concerns that its talcum powder products caused cancer in thousands of consumers. This week, there was news on the talc-powder front, which caused J&J shares to rally by nearly 7%.
Bearish Nobias Credible Analysts Opinions:
Hunting Alpha, a Nobias 4-star rated author, recently published an article at Seeking Alpha which laid out Johnson & Johnson’s current legal and operational headwinds. The author wrote, “JNJ has been subject to over 40,000 lawsuits over its talcum baby powder product over the last decade. According to Neal Katyal, the legal liabilities are estimated to be as much as $61 billion, which would eat up more than the last 3 years of the company's free cash flows. “That's a big risk.”
Hunting Alpha continued, “On October 14 2021, the company tried to minimize its legal liabilities by creating a separate subsidiary that housed the legal liabilities and filing for Chapter 11 bankruptcy protection. This strategy started to work in early 2022, until in January 2023, the courts ruled that the subsidiary JNJ created in this strategy was not eligible for bankruptcy protection.”
Lastly, regarding JNJ’s legal woes, they stated, “The recent update in March 2023 is that JNJ failed to win the support of the Federal Appeals Court. Now, the company seeks to bring the case to the Supreme Court.” But, as the author points out, court room issues aren’t the only headwinds that Johnson & Johnson faces. They wrote, “Compounding the legal attacks, I think JNJ is due for some operational challenges too. Stelara - - an anti-inflammation drug with a wide variety of uses, including the treatment of Crohn's disease - makes up 18.1% of JNJ's pharmaceutical revenues and 10.1% of overall revenues. This makes it the leading revenue contributor to JNJ's pharmaceutical line. In FY22, $9.7 billion worth of revenues came from Stelara. The problem is it is due to lose its loss of exclusivity (LOE) status as patents for the drug expire in late 2023.”
Overall, they concluded their piece with a bearish ending. Hunting Alpha finished their report by stating, “Taking into account the read of the technicals, I am confident that JNJ will underperform the S&P 500 over the next few months and quarters.” “But I do not have the same level of confidence in having a negative total shareholder return expectation on the stock. Hence, I rate JNJ stock neutral/hold, albeit with a bearish slant.”
Bullish Nobias Credible Analysts Opinions:
Brett Ashcroft Green, a Nobias 4-star rated author, also recently published an article on JNJ at Seeking Alpha; however, unlike Hunting Alpha, Green’s takeaway was bullish. Green highlighted J&J’s strong dividend history, stating that his investment strategy revolves around accumulating shares of dividend aristocrats.
Regarding U.S. dividend aristocrats, Green said, “There are currently 66 names on the list of stocks that have paid and raised dividends for at least 25 years.” He continued, “Two of my current favorites, Coca-Cola (KO) and Johnson and Johnson (JNJ) have been paying and raising dividends longer than that at more than 50 years each.”
“Based on their low beta and consistent growth, these are two stocks that are worth locking up in the compound interest safe for generations. I'm buying both of these stocks currently in outsized portions for my income portfolio,” Green added.
Looking at JNJ’s return potential, specifically, Green wrote, “Johnson and Johnson has the highest 10-year growth rate of the two at 6.36%. We are also assuming that the stock appreciates modestly just by tracking the dividend growth rate. Even under these conservative assumptions, an average annual return of 17.13% turns $1,000 into $2713 after 10 years.”
He concluded, “I am buying both of these stocks right now and they continue to grow into larger and larger positions in my portfolio. Both are buys with low betas and amazing records of returning capital to investors. Controlling our beta brain waves with low beta stocks should have satisfactory results.”
Josh Lamb, a Nobias 4-star rated author, highlighted the most recent chapter of JNJ’s talc-powder saga in an article at ProactiveInvestors this week. Lamb wrote, “Johnson & Johnson (J&J) has offered nearly US$9bn to settle thousands of lawsuits alleging its baby powder and talc products cause cancer.”
He continued, “It had initially proposed a US$2bn pay-out, attempting to quash some 40,000 lawsuits, but raised the figure almost five-fold to US$8.9bn, suggesting that 60,000 claimants already supported the new offer.” This $8.9 billion figure caused JNJ shares to rally by 6.9% this week.
A couple of Nobias credible Wall Street analysts published reports on JNJ’s newest offer in the negotiation process this week. According to The Fly on the Wall, “Wells Fargo analyst Larry Biegelsen notes Johnson & Johnson announced that it re-filed for chapter 11 bankruptcy to settle for $8.9B about 60K talc claims, which is slightly better than the firm's expectation of a $10B settlement. However, Wells notes that its legal expert sees the odds this goes through at 50/50. The firm has an Overweight rating on the shares with a price target of $195.”Biegelsen is a Nobias 4-star rated analyst.
Also this week, The Fly on the Wall published a note which stated, “Guggenheim analyst Vamil Divan made no change to the firm's neutral rating on Johnson & Johnson after participating in the conference call management hosted to discuss the company's updated plan to settle all current and future talc litigation claims.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
The firm left the call "confident" that the updated plan is "reasonable" and should ultimately allow for the situation to be resolved. The resolution of the talc litigation would remove an important overhang on J&J shares and allow investors to focus on the Consumer Health separation, as well as important upcoming data, Guggenheim says.” Divan is a Nobias 5-star rated analyst.
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, the credible analyst community is split on JNJ’s prospects after its nearly 7% rally this week. 3 out of the 6 credible individuals that Nobias tracks who cover Johnson & Johnson believe that shares are likely to increase in value.
The credible author community is slightly more bullish, with 62% of recent articles published on JNJ expressing a “Bullish” bias. The average credible analyst price target that is currently being applied to JNJ shares is $190.40. Today, Johnson and Johnson shares trade for $165.15. Therefore, the average credible analyst price target represents upside potential of approximately 15.3%.
Disclosure: Nicholas Ward is long JNJ Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.