J&J: Wide Moat in Healthcare

05/02/2014 8:00 am EST


Josh Peters

Editor, Morningstar DividendInvestor

This healthcare stock earns an AT credit rating and maintains a dividend that is among the very safest of any stock in any industry, asserts Josh Peters in Morningstar Dividend Investor.

Johnson & Johnson (JNJ) holds a leadership role in diverse healthcare segments; contributing just over a third of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drug Remicade and psoriasis drug Stelara.

The medical device and diagnostics group brings in more than 40% of sales, with the company holding controlling positions in many areas, including orthopedics and Ethicon Endo-Surgery’s surgical devices.

The recent acquisition of Synthes positions the company as a leader in the fast-growing trauma segment. The consumer division largely rounds out the remaining business lines, solidified by the 2007 acquisition of Pfizer’s PFE consumer business.

We believe Johnson & Johnson carries one of the widest moats in the healthcare sector, supported by intellectual property in the drug group, switching costs in the device segment, and strong brand power from the consumer group.

An extensive salesforce also makes the company a powerful candidate for a smaller biotechnology company looking to partner on a new drug, which strengthens Johnson & Johnson’s ability to bring new products to market.

Research and development efforts are resulting in next-generation products. The pharmaceutical group has a robust late-stage product pipeline with several potential blockbusters in late-stage development or recently approved.

The company has also created new medical devices, including ceramic orthopedics and minimally invasive surgical tools. Diverse operating segments, coupled with expected new products, insulate Johnson & Johnson from the patent cliff facing the pharmaceutical group.

Through 2013, Johnson & Johnson had increased its dividend for 51 consecutive years. Additionally, J&J earns our AAA credit rating, and its payout ratio is at the low end of its Big Pharma peer group.

With a yield of 2.8% at our $94 fair value estimate (and 3.0% if the upcoming dividend increase meets our forecast), we like J&J’s potential for low risk total returns averaging 9%–10% year.

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