The Bluest of Blue Chips

04/02/2009 1:00 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says Johnson & Johnson is one of the very best companies and it’s trading at its cheapest price in years.

Health care stocks have been volatile of late, as the prospects for significant health care reform are impacting the group. Johnson & Johnson (NYSE: JNJ) stock has not been immune to the weakness in the group, with these shares trading at a 26% discount to their 52-week high of more than $72. (The shares closed around $53 Wednesday—Editor.)

While these shares could remain under pressure in the short run, the company’s prospects are significantly brighter than the typical health care stock.

First, Johnson & Johnson’s diversified business portfolio, which includes pharmaceuticals, medical technology, and consumer products, should help smooth out results and cushion declines in any one area.

J&J’s stable of strong brands is impressive. Consumer brand names include Neutrogena, Lubriderm, Reach, Carefree, Listerine, Stayfree, Splenda, Tylenol, Sudafed, Zyrtec, and Pepcid AC. In pharmaceuticals, the firm has Remicade, a treatment for Crohn’s disease; Topamax, for epilepsy and migraines; Procrit, for anemia, and Risperdal for schizophrenia. Medical-technology products include stents and surgical equipment.

Drugs comprise around 39% of sales and 48% of operating profits. Medical devices account for around 36% of sales and 36% of profits. Consumer business represents around 25% of sales and 16% of profits. Overseas sales account for roughly 50% of revenue.

While this business portfolio has traditionally produced steady gains for J&J, results this year are likely to show a modest decline in growth. The firm is being hurt by a slowdown in the drug sector. Also, the strong US dollar will impact overseas business.

[But] the company’s financial position is solid, which affords Johnson & Johnson a number of competitive advantages. For 2009 overall, Wall Street is expecting per-share profits of $4.49, down around 1% from 2008. Profits are expected to return to the growth track in 2010.

Johnson & Johnson stock is already reflecting much of the earnings slowdown. These shares trade at less than 12x the 2009 estimate. For a company with such strong finances—the firm had nearly $13 billion in cash at the end of 2008—and a blue-chip pedigree, the current valuation seems modest.

Enhancing appeal is the stock’s yield of 3.5%. Johnson & Johnson has boosted its dividend annually for more than 45 years. The solid balance sheet should provide plenty of support to the dividend, as well as fund share repurchases and acquisitions.

Johnson & Johnson offers a top total-return selection at current prices. The dividend yield is attractive in this low-yield environment, and the payout is safe.

These shares represent a core holding for any portfolio. Investors should take advantage of the price decline to buy the stock. Please note that you must already [own] at least one share of Johnson & Johnson [to join its] dividend reinvestment plan. You cannot make your initial investment directly with the company.

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