Johnson & Johnson: Recession Safety, Growth And Valuation

As the ongoing bull market has become the longest in history and S&P is trading at an all-time high, many investors are afraid that a bear market is just around the corner. Consequently, they hesitate to have exposure to stocks, fearing that the losses from the current levels may be devastating. However, it is a shame to miss the exceptional long-term returns of the stock market due to abstract fears of a bear market, particularly given that no one can time bear markets. Therefore, in this article, I will analyze Johnson & Johnson (JNJ), which offers exciting growth prospects, a reasonable valuation and resilience to recessions and bear markets.

Resilience to Recessions

Johnson & Johnson has proven markedly resilient to recessions. In the Great Recession, the worst financial crisis of the last 80 years, most companies saw their earnings collapse and S&P lost 55% in less than two years. On the contrary, Johnson & Johnson continued to increase its earnings thanks to the nature of its products. As both its consumer products and pharmaceutical products are essential to consumers, the latter do not reduce their consumption of these products even under the most adverse economic conditions. As a result, Johnson & Johnson significantly outperforms the market during recessions. In the Great Recession, the stock lost 33% from peak to trough, much less than the broad market, and thus made it easier to its shareholders to retain their shares, particularly given that it continued to grow its earnings and its dividend.

Growth Prospects

Most investors know this stock from its consumer products and thus consider it a mature stock. The consumer segment is facing increasing competition, as it has become easier than ever for new brands to be promoted at a low cost via social media. Moreover, the online giants, such as Amazon (AMZN), are trying to disrupt the supply chain and sell products directly to consumers. As a result, this segment of Johnson & Johnson reported marginal sales growth last year and flat sales in Q2.

However, the most important segment of Johnson & Johnson is its pharmaceutical division, which generates half of the total sales of the company. This segment is firing on all cylinders right now. It grew its operating income 25% last year and 18% in Q2 thanks to impressive momentum in immunology and oncology. In the last seven years, this segment has grown at a double rate compared to the pharmaceutical industry (8.6% vs. 4.3%).

Moreover, the pharmaceutical segment has exciting growth prospects ahead. Management expects up to 10 major launches over the next three years, with each launch being capable of generating more than $1 billion in annual sales. Overall, as management has planned more than 50 product line extensions until 2021, it expects to continue to outperform the industry by a wide margin for at least another three years.

Growth Record

Johnson & Johnson boasts of an exceptional growth record. It has grown its adjusted operating income for 34 consecutive years and its dividend for 56 consecutive years. This is an impressively consistent record, particularly given that the company operates in the highly competitive pharmaceutical business. Given this record, its shareholders can rest assured that they will continue to receive a growing dividend even under the worst economic conditions.

Valuation

Thanks to the strong momentum of its pharmaceutical segment, Johnson & Johnson is expected to grow its earnings per share by 12% this year and another 6% next year. Even better, the stock is trading at a current P/E ratio of only 16.9. This is markedly low for a company with such an exceptional growth record, particularly given the current rich valuation of the other well-known dividend aristocrats, which are trading at P/E ratios above 19. The reason for the relatively cheap valuation of Johnson & Johnson is the perception of the market that pharmaceutical stocks bear a high risk level.

However, Johnson & Johnson is not a common biotechnology company. It has such a well-diversified portfolio that it can withstand even major breakthroughs of its competitors. To be sure, when Gilead Sciences (GILD) launched Sovaldi, Johnson & Johnson saw its operating profit in the market of hepatitis C plunge 28% but its total operating profit still rose 4%. This example confirms that Johnson & Johnson deserves a richer valuation than most pharmaceutical stocks.

The Bottom Line

As the market is trading at an all-time high, most stocks are trading at rich valuation levels. This is particularly true for the popular dividend aristocrats, most of which are hardly growing their earnings at this phase of the economic cycle. However, Johnson & Johnson is a bright exception. It is trading at an attractive valuation, it has exciting growth prospects and has proven remarkably resilient to recessions. As a result, those who purchase the stock now are likely to be highly rewarded while they can also rest assured that the company will continue to perform well whenever the next recession shows up.