Source: PaxForex Premium Analytics Portal, Fundamental Insight
As you know, Johnson & Johnson has received tens of thousands of lawsuits related to talcum powder, which plaintiffs claim is causing them cancer. But it's fair to say that it's not unusual for a company the size of Johnson & Johnson to have to deal with some legal problems.
But the number and nature of the company's lawsuits, and the fact that some plaintiffs claim that the drug maker knew about the dangers of talcum powder but ignored them to make money, have damaged the company's image.
Fortunately, Johnson & Johnson seems to be getting closer to resolving this situation and putting it behind them. Let's take a closer look at what this could mean for investors.
Last week, Johnson & Johnson announced that its subsidiary LTL Management is offering $8.9 billion to settle all talc-related lawsuits. That's significantly more than the $2 billion the company had previously offered. The $8.9 billion amount would be paid over 25 years and, Johnson & Johnson stressed, would not constitute an admission of wrongdoing.
The company also says that more than 60,000 stakeholders support the settlement under these terms.
The settlement would allow the pharmaceutical giant to avoid additional time and money spent defending itself in court and potentially being found liable for damages allegedly caused by its talc products. And while $8.9 billion sounds like a lot of money, by and large, it's not, especially for a company the size of Johnson & Johnson. Last year, the company had revenue of $94.9 billion, a 1.3 percent increase over the previous year.
Johnson & Johnson's net income for the year was down 14.1% to $17.9 billion. So the $8.9 billion for this settlement would be just under 50% of Johnson & Johnson's net income for last year. Of course, it would be better for shareholders if the company did not have to pay this amount at all, but it would also not be a particularly devastating settlement amount.
While the proposed settlement is good news for Johnson & Johnson, there are many reasons to consider investing in the company regardless of these new developments. First and foremost, Johnson & Johnson is the king of dividends. The company is on a fantastic streak of 60 consecutive years of dividend growth. And the company's business is strong enough to withstand many more raises, even with lawsuits.
Johnson & Johnson's long list of products includes more than a dozen drugs with annual sales of more than $1 billion. The company's pipeline has 109 programs that regularly provide new approvals and indications. The drug maker also has a medical device business that can grab hold of the exciting and fast-growing robotic surgery market with its Ottava robotic system.
Johnson & Johnson is set to spin off its consumer health division, which will reduce diversification but increase revenue growth. Despite all this, Johnson & Johnson stock has struggled, in part because of problems with the talcum powder lawsuit. That may be why the stock rose after the company announced an $8.9 billion settlement, though it has still fallen about 10 percent over the past year.
Johnson & Johnson may remain vulnerable in the short term, as the economic situation remains difficult and could affect the company's financial results in the same way it did last year (for example, currency fluctuations have affected Johnson & Johnson's revenue growth). But for long-term investors, now is a good time to open a position in Johnson & Johnson.
With this legal agreement, the company is getting rid of one of its biggest risks that have been damaging to its image. The spin-off of the consumer health division will have a positive impact on business growth, and the economy will eventually recover. It will lead to top and bottom-line growth, and increased payments and Johnson & Johnson will remain a leader in health care for years to come.
As long as the price is above 161.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 163.70
- Take Profit 1: 167.00
- Take Profit 2: 171.00
Alternative scenario:
If the level of 161.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 161.00
- Take Profit 1: 158.00
- Take-profit 2: 155.00
