Shares of Johnson & Johnson (NYSE:JNJ) dropped this week to a new 52-week low. The company’s business model makes it resilient to recessions and other significant economic issues, and it provides a consistent dividend that keeps rising. JNJ stock, in general, strikes me as a low-risk investment right now, especially given how low it is currently priced.
The share price of Johnson & Johnson has recently decreased to around $150. This represents a 20% decline from the 52-week peak in spring 2022 and a decline of 7% over the previous year. JNJ is currently reasonably priced as a result of this, as we will see later.
The decline in the share price lacked a distinct cause. Instead, there has been a general decline in equity markets, an increase in interest rates that makes income stocks less desirable, and some bad news relating to litigation that is still pending. But I don’t believe it is a good cause for JNJ’s market worth to decrease by many billions of dollars considering that it has been defending cases involving baby powder for years.
JNJ Is Equipped to Handle Any Mishaps
The healthcare sector is home to a sizable and varied group of businesses called Johnson & Johnson. Pharmaceuticals, medical technology, and non-economy-sensitive consumer goods make up its three main business segments. There is a significant benefit when the economy is struggling because none of these three items are cyclical. Economic growth does not alter the need for medications and medical technology since people still need medical treatment whether they are ill or concerned about their health. Unlike electronics, cars, and other comparable things, the demand for JNJ’s consumer goods, such as contact lenses, creams, and so on, isn’t greatly impacted by the economy.
The past has seen many examples of this adaptable business model, especially during the Great Recession. From 2007 and 2010, Johnson & Johnson did not have a single year of declining profits per share growth. Instead, during that time, earnings per share increased by an average of 5% annually. That was a rather impressive performance considering how many other firms failed during that particularly severe economic crisis. JNJ had no issue paying its dividend and was able to maintain its history of dividend increases because its earnings per share kept rising.
In that, the pandemic harmed JNJ, it was a distinct kind of recession. Elective operations were frequently put off when there weren’t enough resources for healthcare. This had a negative impact on JNJ’s medical technology division while its pharmaceutical division did not notably benefit from the pandemic, in contrast to competitors Pfizer (NYSE:PFE) and Merck (NYSE:MRK), which saw an increase in COVID medication sales.
The pandemic was a bigger obstacle for JNJ than the typical recession, yet the business was nevertheless quite successful:
As we can see, EBITDA did decrease in 2020, but it wasn’t a significant decrease. After all, J&J still had $24 billion in EBITDA during that time of economic crisis. Soon after, JNJ’s EBITDA started to increase once more and soon reached new highs of more than $30 billion. JNJ’s revenues decreased during the pandemic, but they were still high enough to easily fund the dividend (profits per share dropped by 9% between 2019 and 2020 before rebonding again in 2021). For this reason, JNJ has kept increasing its dividend in recent years, just as it has done for the previous 60 years.
Yet, JNJ is also in a strong position in case something negative occurs in addition to its defensive business strategy. JNJ has one of the greatest balance sheets in the world and a very solid business model. Johnson & Johnson is one of just two businesses with a AAA credit rating (NASDAQ:MSFT). JNJ had a net debt of $16 billion at the end of the previous quarter. That amounts to a significant portion of EBITDA.
JNJ Stock Is Affordable
Johnson & Johnson is currently relatively affordable, both in absolute terms and relative terms, as a result of the recent significant decline in share price. With an estimated $10.50 in earnings per share for this year, the current share price of $153 represents around 14.6 times the anticipated earnings. This is superior to the JNJ average value in the past, as evidenced by the graph below:
The median earnings multiples for the past three, five, and ten years, according to YCharts, have been between 23 and 25. Although I don’t believe JNJ will reach this price soon, the significant discount indicates that now is a good time to buy. The fact that JNJ has grown to be relatively large is one defense for why the stock is unlikely to trade at 20+ earnings multiple in the near future. JNJ is anticipated to develop marginally more slowly than in the prior decade, which will result in a lower valuation in the future because the law of large numbers indicates that growth slows with time. Multiple compression is also necessary as a result of the rise in interest rates.
Even if we choose to ignore these facts and assume that JNJ should be valued at 18x net profit rather than 23–25x net profit in the future, the stock price would still rise significantly because the current 14.6x earnings multiple would permit a 23% share price increase if JNJ traded at 18x net profit in the future. Before accounting for any future increases in earnings per share, the share price could increase by a few tens of dollars even with a 16.5x net earnings multiple.
Future profits per share growth should still be significant even though it is likely to be modest. Increasing healthcare expenses in the U.S., Europe, and several emerging and developing nations provide up fresh market expansion potential. J&J can accelerate its expansion by making acquisitions, as it has in the past. Last but not least, Johnson & Johnson needs to keep regularly repurchasing shares. If everything else keeps the same, this will reduce the number of shares and gradually increase earnings per share. JNJ should be able to reduce the number of its shares by around 1% a year based on what has already occurred. This will somewhat accelerate the annual growth of profits per share.
Nonetheless, the dividend is the most crucial component of JNJ’s strategy for returning capital to shareholders. The dividend yield for Johnson & Johnson is now 3.0%. JNJ’s present dividend yield appears favorable in comparison to the dividend yields it has previously provided because it is significantly greater than the market’s, which is less than 2%:
JNJ’s dividend yield has never exceeded 3% in the past five years, with the exception of the first sell-off during the early stages of the COVID outbreak. The dividend yield was typically in the range of 2% and 2.5%. Now appears to be a better-than-average opportunity to increase or add to an investment in this enormous healthcare organization in terms of income yield. Given this plus the fact that JNJ is cheap due to its lower-than-average earnings multiple, there are compelling arguments to believe that the stock is a solid buy at the moment. JNJ’s track record of enduring recessions and other socioeconomic crises is another reason to consider investing in JNJ stock in today’s unsteady economy, where many investors fear a potential recession.
Johnson & Johnson has hit a new 52-week low as a result of a recent decline in share price, which makes it an excellent opportunity to buy. The dividend yield is at an all-time high, the stock price is at an all-time low, and JNJ’s resilience to macro shocks might be a huge asset if a recession occurs in the coming quarters. In the current market, buying a Dividend King that has increased its dividend for 60 years, yields 3%, and has earnings multiple under 15 seems like a wise defensive purchase.
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