JNJ from the WSJ
J&J Needs to Earn Investor Loyalty
By
Spencer Jakab
Jan. 20, 2014 1:11 p.m. ET
Americans may pride themselves on eschewing titles, but investors still revere their corporate nobility.
Expect Wall Street to doff its hat again to Johnson & Johnson when it reports fourth-quarter results Tuesday. It hasn't lagged behind analyst expectations in over a decade and should meet or beat the $1.15 in earnings per share analysts foresee, up from 91 cents a year earlier.
Not just a storied company, J&J is a member of some elite clubs, one of 30 Dow components and a smaller fraternity that still sport triple-A credit ratings. Perhaps most significantly these days, it is a "dividend aristocrat," one of the roughly 10% of S&P 500 companies that has raised its payout every year for at least a quarter century.
In a world starved for reliable income, J&J stands out even in an industry known lately for generous dividends. Its share price has trounced rivals Pfizer Inc., Merck & Co., GlaxoSmithKline PLC and Eli Lilly & Co. in the past decade. It is the only one of the group to beat the S&P 500.
But J&J's pedigree isn't quite what it's cracked up to be. When major blockbusters began going off-patent a little over a decade ago, drug manufacturers took a scalpel to their costs and began spewing cash. No one else in the industry is a dividend aristocrat. But J&J is last in that group in total cash returns to shareholders through dividends and buybacks over 10 years, relative to its debt-adjusted market value.
Buybacks are lumpier than dividends, yet nearly identical in financial impact. And J&J's recent acceleration of repurchases may be fleeting. It embarked on a huge repurchase plan that ended recently to soak up shares issued for the 2012 acquisition of Synthes.
J&J deserves credit for its exposure to medical devices and consumer products on top of pharmaceuticals. That will soothe the sting of patent expiration in major markets for top drug Remicade between 2015 and 2018. But that balance is amply reflected in a multiple of debt-adjusted market value to earnings before interest, tax, depreciation and amortization that is a fifth higher than peers on average.
J&J has had a great run, but further outperformance will have to be earned, not inherited.
