Barron’s on Johnson & Johnson

Barron’s gives some love to one of my favorite Buy List stocks, Johnson & Johnson (JNJ). Here’s an excerpt:

One of the health-care giant’s biggest virtues is its prodigious ability to generate cash. That has helped keep its debt load low. Johnson & Johnson is one of just four U.S. industrial companies with a coveted AAA rating from Standard & Poor’s. (The others: Automatic Data Processing, Exxon Mobil and Microsoft.) At the end of 2009, the company had about $14 billion in debt, compared with shareholder’s equity of $50.6 billion. Cash flow from operations came to $16.6 billion last year, up from about $15 billion in 2008. Cash and equivalents weighed in at $15.8 billion on Dec. 31.
The company is devoting some of its cash to its quarterly dividend, which it boosted 10.2% last month, from 49 cents a share to 54 cents — marking the 48th straight annual payout increase. At $2.16 a year, the yield is a very healthy 3.3%. Bill McMahon, president of ThomasPartners, an investment advisory firm in Wellesley, Mass., with a stake in the company, says consistent dividend increases are “a good directional signal of future returns.”
Another priority is buying back stock. In 2007, the board authorized the repurchase of as much as $10 billion in shares; $9 billion worth has been reacquired so far.
The cash hoard also helps Johnson & Johnson to buy companies, typically for $1 billion or less, to expand its product lines or get into new ones. For example, J&J paid $1 billion last July for an 18.4% equity stake in the biotech company Elan (ELN). In exchange, it got access to substantially all of Elan’s anti-Alzheimer’s products, including bapineuzumab, a promising drug now in Phase III trials.
In its quest to come up with new products, Johnson & Johnson pumped nearly $7 billion into R&D last year, even as it was restructuring its operations, an action expected to trim up to $1.7 billion in annual pretax costs. The company has intensified its effort to fatten its margins, which slid in recent years as patents expired on highly profitable prescription drugs. An encouraging sign: In the first quarter, selling, marketing and administrative expenses equalled 30.5% of sales, down from 30.7% a year earlier.

Posted by on May 1st, 2010 at 5:07 pm


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