As a result of the current market turmoil, Johnson & Johnson (JNJ) shares are down nearly 9% from their April 25 peak, when the share price approached $185.
However, the downturn has created a great opportunity to add more shares to any position in this leader in the global pharmaceutical industry. My stance on Johnson & Johnson is bullish.
About Johnson & Johnson
Johnson & Johnson has been in the pharmaceutical industry for more than a century, developing and marketing a wide range of pharmaceutical products and devices, personal care, and hygiene products.
The company’s headquarters are in New Brunswick, New Jersey.
Lower Price, but for How Long?
Any news of the resurgence of the COVID-19 virus is bound to blow up Johnson & Johnson’s stock as the U.S. pharmaceutical giant is the manufacturer of one of the most injected vaccines against the infection.
Many believe that the problem is over just because the daily infections and transmission rates are not alarming. The situation in healthcare institutions in western countries currently looks calm in terms of hospitalization and intensive care. Regarding China, things are slowly returning to normal after a period of a strict lockdown and other restrictions imposed in several urban areas.
In reality, however, the virus is still a major concern, albeit under different variants called BA.4 and BA.5. These appear to be less aggressive than the previous strains, but with the coronavirus, things can suddenly take a turn for the worse.
A small spark is enough to ignite the fuse and bring us back to where we were a few months ago. Governments would then possibly reintroduce restrictions to curb the spread of the virus, and the population would again undergo a full vaccination cycle.
Chances are this scenario will happen in the late summer/early fall.
In many countries, the calendar year is heading towards its hottest period, which would harm the virus if it were to cause seasonal flu, which peaks in winter, but things are a little different with the COVID-19 virus. The infection tends to wake up when temperatures rise.
The warm weather and people traveling en masse increase the chance of transmission since social distancing is no longer mandatory, and people no longer have to wear face masks.
COVID-19-Adapted Vaccine Wanted
The risk is already being felt by politicians. On June 14, EU Health Commissioner Stella Kyriakides stated via Twitter (TWTR) that the pandemic is not over and that we need to be prepared in the coming months with a sufficient number of vaccines, including those adapted to variants.
The need to arm healthcare providers with a bespoke product will likely prompt the U.S. drugmaker to update shareholders again on guidelines for COVID-19 vaccine sales. The company discontinued this type of guidance due to an oversupply of the product in the market.
Should the COVID-19 virus recur globally, Johnson & Johnson could see a sharp rise in its share price as its COVID-19 vaccine (Ad26.COV2.S) is, along with Pfizer Inc. (PFE) and Moderna, Inc. (MRNA), the most commonly injected vaccine during vaccination campaigns.
Further Dividend Increases Expected
Buying shares of Johnson & Johnson today can lock in a dividend yield of more than 2.66% (at the time of writing this article), which is already significantly above the market average. The S&P 500 (SPX) is at the moment offering a dividend yield of about 1.4%.
The U.S. drug giant is financing the payment of a quarterly dividend of $1.13 per common share with a solid balance sheet. As of April 2, 2022, the company had a total of $30.4 billion in cash and short-term securities against total debt of $33.2 billion.
The interest coverage ratio of 193.4 (calculated as earnings before interest and taxes (EBIT) divided by total interest expense on all outstanding debt) determines that the U.S. drugmaker has an easy time paying the interest expense due on the outstanding debt.
Ideally, anything above 1.5 indicates creditworthiness, while anything below could mean the company is struggling to please lenders.
Also, the company doesn’t rely heavily on debt, as evidenced by its debt-to-equity ratio of just 0.44. Plus, it can refund it all through earnings before interest, taxes, depreciation, and amortization (EBITDA) in just 12 months, as evidenced by the debt-to-EBITDA ratio of 1.09.
So, shareholders shouldn’t worry about the financial health of Johnson & Johnson, which is also backed by strong operations. These generated a net income of approximately $7.13 billion (up 3% year-over-year) in the first quarter of 2022 on total revenue of approximately $23.43 billion.
Revenue rose nearly 5% year-over-year, reflecting a 6.3% year-over-year jump in the Pharma segment to $12.87 billion and a nearly 6% year-over-year increase in the MedTech segment to $6.97 billion.
Those two increases offset a small 1.5% decline in the consumer health segment, which reported revenue of about $3.59 billion in the first quarter of 2022.
For full-year 2022, the company is forecasting EPS of $10.15 to $10.35, up from $9.8 a year ago and higher than the median analyst estimate of $10.27.
That earnings level is more than double the annualized dividend of $4.52, leaving ample room for further dividend increases. Despite strong headwinds in the market, the company increased its dividend by 4.95% last year, demonstrating the robustness of its business.
Should the company increase the dividend again, which is entirely possible, the stock price could receive a powerful boost to higher levels.
Wall Street’s Take
In the past three months, 10 Wall Street analysts have issued a 12-month price target for JNJ. The stock has a Moderate Buy consensus rating based on six Buys, three Holds, and zero Sell ratings.
The average Johnson & Johnson price target is $194.89, implying 14.5% upside potential.
Valuation
Shares are changing hands at $170.08 as of the writing of this article for a market cap of $447.5 billion, a price-earnings ratio of 22.9, and a price-sales ratio of 4.8.
The stock’s price has fluctuated between a low of $155.72 and a high of $186.69 over the past 52 weeks.
Maybe these ratios do not give a clear idea about the attractiveness of the current share price, as the 50-day moving average of $178.56 and the 200-day moving average of $169.93 are instead able to do.
From this comparison, it’s crystal clear that these share price levels could be one of the last chances to get into this stock before the expected strong tailwind of a possible resurgence of the COVID-19 virus triggers a quick run-up for the U.S. drug manufacturer.
Conclusion
The stock is trading significantly lower than it was a few weeks ago, after a significant drop from its all-time high on April 25.
Due to an expected resurgence of the COVID-19 virus worldwide, the stock price could recover strongly, as Johnson & Johnson produces one of the most widely used vaccines against the coronavirus.
The market now offers the opportunity to lock in a very good dividend yield.
