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One of my favorite companies is Johnson & Johnson (NYSE: JNJ), the world’s largest health care corporation.
I’ve always considered the company almost a health care ETF with its three main divisions – consumer products, pharmaceuticals and medical devices. It also pays a decent dividend – about 3% – that grows annually.
J&J is also a consistent earnings producer. Its latest quarterly results were again very good, despite the headwinds from a too strong U.S. dollar. The good results boosted the stock nearly 8% last week. It’s now positive for the year, which is more than most stocks can say.
It’s steady and boring, almost Warren Buffett-like. In the words of CEO Alex Gorsky, J&J’s “broad-based structure has helped us deliver strong, consistent and sustainable financial performance.”
Activists Circle
But in today’s investing climate no one likes tortoises. Everyone likes hares that they dream will race higher in price. So the activists have begun circling Johnson & Johnson.
The lead activist is Artisan Partners, which manages $100 billion in assets. It owns a $480 million stake in J&J.
Artisan describes Johnson & Johnson as being a poor performer for years. It wants the company to split its three main divisions into three separate companies. Artisan says this move would unlock $90 billion in value for shareholders.
J&J’s Gorsky counters by telling Reuters that “because of our broad base across health care, we are uniquely positioned to be a partner of choice” with other health care firms.
The company believes its conglomerate structure makes it perfectly positioned for the new cost-cutting realities in health care. It believes it can offer an overall lower cost, for example, to a patient that is having a hip replacement.
I’m sure Artisan and the other activist investors see the roughly $18.5 billion of cash that J&J is sitting on too. I’m sure the activists are dreaming of huge stock buybacks.
Source: Bloomberg
J&J’s Cash Hoard
But Johnson & Johnson saved that cash to invest into its business lines. And with biotech and related stocks down big so far this year, J&J is certainly on the prowl.
Its CFO, Dominic Caruso, told the Financial Times, “We are actively looking for the right opportunities … but we’re patient. We’ll only act when we see the right value-creating deal at the right price with the right partners.”
That is why J&J sat out the M&A action that has been going on in the sector since 2014.
That is the correct approach. Continued weakness in biotech and pharma will only create more opportunities for Johnson & Johnson. The premium prices these stocks once had are disappearing fast.
With its huge cash pile and low debt, I believe Johnson & Johnson will make a splash in 2016 with some sort of major deal, most likely in its pharmaceutical division. I look for any acquisitions to be of foreign targets, since most of its cash is “trapped” overseas.
And despite its conservative history, even a blockbuster deal is possible. Just last summer, it was rumored that J&J and Swiss pharmaceutical giant Roche Holding AG (OTC: RHHBY) were going to make a joint $143 billion bid for another colossus of the industry, GlaxoSmithKline PLC (NYSE: GSK).
J&J’s stock outperformed both the NYSE Arca Pharmaceutical Index and the Nasdaq Biotechnology Index so far in 2016. If the markets stay choppy, that outperformance will likely continue. After all, we all know who won that race between the tortoise and the hare.
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