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Is Johnson & Johnson a Buy?

Keith Speights, The Motley Fool

Johnson & Johnson (NYSE: JNJ) is one of the premier blue-chip stocks. It's the largest healthcare company in the world. But J&J stock is underperforming the S&P 500 by a wide margin so far in 2019. It didn't perform as well as the broader market last year, either. The S&P 500 has trounced J&J in total return over the past decade.

All of this might make you think that Johnson & Johnson is a stock to avoid. But is it actually a smart pick for long-term investors to buy now? Here are the arguments for and against J&J.

Die with buy, sell, and hold on sides next to $100 bills

Image source: Getty Images.

Reasons to buy

One of the biggest attractions for Johnson & Johnson is its dividend. Income-seeking investors will probably like the current yield of 2.9%. It's also quite reassuring that J&J has increased its dividend payout for 57 consecutive years, making the company a solid member of the elite group of stocks known as Dividend Aristocrats.

There's also a lot to like with J&J's pharmaceuticals business. The company posted especially strong growth in the second quarter of 2019 for blood cancer drugs Darzalex and Imbruvica. Immunology drugs Stelara and Tremfya also continue to enjoy tremendous sales momentum.

The company's pipeline also should fuel growth. J&J anticipates filing for regulatory approval of 15 new programs over the next five years. 

Johnson & Johnson's other business segments are also growing, albeit not nearly as much as its pharmaceuticals segment. These segments help the company generate strong cash flow on a consistent basis. They also provide J&J plenty of diversification across the healthcare sector.

Speaking of cash flow, J&J delivered free cash flow totaling $21.9 billion over the last 12 months. This should give investors a warm-and-fuzzy feeling that the dividends will keep flowing. The company also has a cash stockpile of around $15 billion, giving J&J ample financial flexibility for future dealmaking and share buybacks.

Reasons to stay away

Probably the main reason to stay away from Johnson & Johnson stock is that it isn't likely to deliver impressive growth. The company expects full-year 2019 adjusted operational sales growth of no more than 3.7% with adjusted earnings-per-share growth of 5.5% at most. That's nothing to get excited about.

There are several reasons J&J's growth will be relatively low. The company faces declining sales for its top-selling drug Remicade due to biosimilar competition. Sales for prostate cancer drug Zytiga are dropping as it faces generic rivals. J&J is also experiencing declines across the board for its cardiovascular franchise, which includes Xarelto, Invokana, and Procrit.

In addition to these headwinds, Johnson & Johnson is embroiled in litigation over its opioid drugs and allegations that it knew about asbestos in its talc-based products. While J&J CFO Joe Wolk stated in the Q2 conference call that the company is "on very firm ground with respect to the facts" in these cases, they still present risks for the company.

J&J could make strategic acquisitions to drive more growth. However, the wisdom of its decision to acquire Actelion in 2016 is still suspect. The company spent $30 billion to buy Actelion. But it's not even making $3 billion annually from the pulmonary hypertension drugs gained in the deal. There's an awfully long payback period at the current rate of growth for the Actelion drugs.

A split decision 

So is Johnson & Johnson a buy? It depends on what kind of investor you are.

For income-seeking investors, J&J arguably claims one of the safest dividends on the market. You can buy the stock and pretty much bank on getting an attractive dividend payment quarter after quarter.

However, growth-oriented investors can find much better stocks to buy than Johnson & Johnson. To use a car analogy, J&J is a minivan. It's practical and safe, but it isn't going to give you the acceleration of a sports car. If you're looking for the sports car kind of stock, J&J won't be a great pick. 

I'm more of a growth investor, so my view is that J&J isn't a stock to buy. There are too many "sports cars" on the market that I like better.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.