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Will Lawsuits Sink Johnson & Johnson Stock?

Thomas Niel

Johnson & Johnson (NYSE:JNJ) stock is blue chip with a capital B. With its solid dividend and AAA credit rating, there’s no denying that JNJ stock is high quality. But can the company’s legal issues bring it to its knees?

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The likely answer is no. While multi-billion dollar judgements sound scary, the company’s sheer size may help insulate it from these issues. Let’s take a closer look at JNJ, and see whether the risks outweigh opportunity with Johnson & Johnson stock.

What’s the Worst That Can Happen?

As InvestorPlace contributor Josh Enomoto discussed Aug. 21, JNJ stock has two material legal risks. The first is the company’s asbestos-contamination scandal. For decades, Johnson & Johnson allegedly kept quiet about the cancer risks of its baby powder products. Civil litigation has been going on for years. But only recently did federal authorities announce an investigation. Recent civil judgements were for $4.7 billion in July 2018, and $300 million in June 2019.

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But JNJ’s liability could be much less. As discussed in this Bloomberg article, most product liability judgements are reduced on appeal. But, as Enomoto discussed in his analysis, bad PR from the litigation could taint Johnson & Johnson stock. This scandal has been going on for years. While the story is well-known, it has not dominated the headlines.

How about the Oklahoma opioid suit? After years of ignoring the opioid crisis, federal and state authorities are getting their act together. This puts opioid manufacturers in their cross-hairs, including JNJ. The Oklahoma suit alleges JNJ’s Janssen Pharmaceuticals unit aggressively marketed opioids.

Oklahoma is looking for $17 billion in damages, but JNJ could end up paying significantly less. Previous Oklahoma opioid suits ended with settlements. Purdue Pharma settled for $270 million. Teva Pharmaceuticals (NYSE:TEVA) settled for $85 million. This means that JNJ could avoid a multi-billion dollar judgement. But JNJ is likely not out of the woods just yet. Other states (or the Federal Government) could pursue action.

Do these legal risks impact the valuation of JNJ stock? Let’s see if shares are selling at a discount (or a premium) to its peers.

JNJ Stock Trades at a Fair Valuation

Johnson & Johnson currently trades at a forward price-to-earnings (forward P/E) ratio of 14.1. The company’s Enterprise Value/EBITDA (EV/EBITDA) is currently 13. Here are the valuations of some of JNJ’s competitors in the pharmaceutical space:

Bristol-Myers Squibb (NYSE:BMY): Forward P/E of 10, EV/EBITDA of 9.8

Eli Lilly (NYSE:LLY): Forward P/E of 16.5, EV/EBITDA of 15.7

Merck (NYSE:MRK): Forward P/E of 15.6, EV/EBITDA of 14.1

Pfizer (NYSE:PFE): Forward P/E of 15.9, EV/EBITDA of 10.1

Based on this peers comparison, Johnson & Johnson stock appears fairly valued. On a forward P/E-basis, JNJ stock trades higher than BMY. On a EV/EBITDA basis, JNJ trades in the middle of the pack. It appears that the recent legal issues have barely impacted the JNJ stock price. Shares are down just about 12% from their 52-week high. It may take more to sink a stock with a $346.4 billion market cap.

JNJ stock may be attractive to dividend investors. While the 2.91% yield is not particularly high, JNJ is a dividend aristocrat. The company has raised the dividend 57 years in a row. But investors should be cautious given the legal risks. While JNJ may be on the hook for much less than anticipated, it’s tough to predict litigation outcomes.

Not a Big Risk, But Not a Big Opportunity

Johnson & Johnson will likely weather the litigation storm. The talcum powder judgement sound high, but the company could appeal and reduce the final amount. The Oklahoma opioid case also features an eye-popping number. Given the Purdue and Teva settlements, a multi-billion dollar verdict would be surprising.

However, the stock offers limited upside. Shares appear fairly valued relative to peers. The company’s dividend aristocrat status is a strong selling point. But for short-term plays, better opportunities lie elsewhere. If the legal issues result in a short-term hit to JNJ’s stock price, investors may find opportunity. Keep Johnson & Johnson on your radar, and consider a position if the stock sees a material drop in price.

As of this writing, Thomas Niel did not have a position in any of the aforementioned securities.

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