Over its 134-year history, Johnson & Johnson has grown from a small New Brunswick operation into an internationally recognized powerhouse of the pharmaceutical sector. It’s a company that has adapted, diversifying its portfolio to include a wide range of products: from commonplace household items to potentially life-changing vaccines and medications. To truly understand what it means to invest in such a diverse company, we conducted a SWOT analysis to determine just how safe the Johnson & Johnson dividend is.
1886 - Three brothers found Johnson & Johnson in New Brunswick, New Jersey.
1888 - Johnson & Johnson publishes Modern Methods of Antiseptic Wound Treatment, which becomes the standard for antiseptic surgery throughout the world.
1898 - Johnson & Johnson becomes the first company to mass-produce dental floss, created from leftover suture milk.
1921 - BAND-AID brand adhesive bandages, invented by employee Earle Dickson, go on sale throughout America becoming the first commercially available dressing for small wounds.
1944 - Johnson & Johnson goes public on the New York Stock Exchange (NYSE).
1959 - Johnson & Johnson acquires McNeil Laboratories, the owners of acetaminophen brand Tylenol. Within a year Tylenol becomes available without a prescription.
1987 - Johnson & Johnson introduces Acuvue, the first brand of disposable eye contacts.
2006 - Johnson & Johnson acquires Pfizer Consumer Healthcare.
2017 - Acquisition of Actelion for $30 billion marks the biggest acquisition in Johnson & Johnson history.
Johnson & Johnson consists of operations in three main areas: pharmaceuticals, medical devices and consumer healthcare. Their pharmaceutical division, the biggest and most well funded of these divisions, is itself split into three main operations: Cardiovascular and metabolic disease, immunology, infectious diseases and vaccines, neurology, oncology and pulmonary arterial hypertension. Five of Johnson & Johnson’s vaccines have been deemed to be among the most important medications in the world by the WHO, a feat made possible through extensive research and development. On the side of the medical device of the business, Johnson & Johnson specializes in the production of some of the most cutting edge medical technology on the market. This technology is vital to a myriad of precise procedures such as spinal surgery, joint reconstruction and many others. Rounding out their product offerings is the consumer healthcare division, consisting mostly of over the counter medicine catering to the general population of consumers. Combining all three sectors of this business, Johnson & Johnson has been able to expand its operations in 60 countries, employing 126,500 people and being ranked the 5th largest pharmaceutical company worldwide.
Johnson & Johnson operates in 60 countries globally, taking a prominent spot in every major region of the global economy. Worldwide they have over 97 facilities, with 32 being in the united states, 27 in Europe, 11 in other Western Hemisphere locations, and 27 in Africa, Asia and Oceania. The U.S. region is mostly focused on the medical devices sector of Johnson & Johnson, a division that operates 22 of the 32 total facilities. The consumer and pharmaceutical segments only operate five facilities each. On the other hand, the consumer segment of Johnson & Johnson operates the most facilities outside the United States with a total of 25 facilities. All the three main sectors have a combined operating space of over 15,153,000 square feet. This is a truly massive global operation that caters to every region’s need, something best exemplified by the concentration of facilities throughout the world.
In addition to their global supply chain dominance, Johnson & Johnson has had outstanding sales numbers in every region. For the data below, we are going to compare a ten-year period, from 2009 to 2019. First and foremost, U.S. sales have been on the rise since 2009. In 2009 Johnson & Johnson had sales of $30.998 billion, compared to 2019 where they were able to bring in $42.097 billion.
Johnson & Johnson has an extremely diverse product portfolio with many well-known over the counter products. The six main areas that they dominate are: skincare, pharmaceuticals, vision, consumer goods, medical devices and consumer health. Some of the most famous products included in this portfolio are: Tylenol, Zyrtec, Nicorette, Acuvue, Neutrogena, Janssen and Splenda. Their third-quarter results proved significant growth across the board for almost every product. Johnson & Johnson’s two strongest product categories are consumer health and pharmaceutical sales. The total combined sales of just these two categories in the third quarter of 2020 came out to $21.1 billion, a 1.7% increase from 2019’s third-quarter results.
Consumer health alone reported a sale total of $3.5 billion for the third quarter of 2020. This represents a 1.3% increase from last year’s third-quarter numbers. The main operational drivers behind the sale increase for this sector were: Tylenol, Listerine, Band-Aid, Zyrtec and Pepcid.
The second category that saw a tremendous boost in sales was their pharmaceutical sector. This sector recorded sales of $11.4 billion, a 5.0% increase from the third quarter of 2019. The main drivers behind this rise were increased sales in a select few brands, including Stelara, Darzalex, Juluca, Erleada and Tremfya.
Johnson & Johnson has a long history of introducing groundbreaking inventions to the everyday customer. Although their modern business strategy is built around medical research and medical devices, Johnson & Johnson has been innovating with new products since the 1910s. Some of the best-known products they’ve introduced are common household goods you wouldn’t even suspect were developed by a pharmaceutical company; items such as duct tape, Band-Aid, Dental Floss, Listerine, and one of the most vital objects used in surgery: sutures.
Since 2010, the company has been pouring increasing amounts of money into research and development. In 2010 they allocated $6.796 billion to research and development. As of 2019 they almost doubled that amount to $11.355 billion.
The commitment to innovation continues to flourish through four subsegments of their business. These four subsegments are the Johnson & Johnson Innovation Centers, JLABS, JJDC and Janssen Business Development.
Johnson & Johnson Innovation Centers is an in-house operation that is located in four regional areas (West North America, East North America, United Kingdom and China). These four centers are located in areas that are known to constantly produce new concepts and innovations. Being an in-house operation, these centers collaborate with each other to find solutions to developing healthcare problems. Although they collaborate constantly, the main focus of each hub is to allocate resources and research for problems specific to each region. One of the recent innovations that they were able to introduce to the market has been rapid COVID-19 testing. The ongoing project they had prior to the pandemic was an influenza detection test which, by the time the pandemic came, they were able to quickly adapt in creating a COVID detection unit that gave results in 20 minutes.
Collaboration is another key factor in Johnson & Johnson’s ability to innovate. Part of their business model involves a startup incubator - the JLAB startup incubator. It’s the starting point for many new entrepreneurs in the healthcare field and currently boasts 356 early startups that are trying to solve everyday medical problems. JLAB has allocated over $41.9 billion in strategic funding, allowed Johnson & Johnson to acquire 21 companies, and was able to set 36 companies on track to be publicly traded. The demographics of the incubator also show the devotion Johnson & Johnson has to early stage startups. 59% of the companies are created by first time entrepreneurs, of which 30% are female-led and another 30% are minority led. Startups in this incubator are at all different stages of publishing their results; some in the early stages of creating a cure, with many of the companies in the final stages of their testing. Empowering innovators across a broad healthcare spectrum allows companies to unleash their full potential and maximize the chances of significant discoveries. Aided by Johnson & Johnson, they are able to not only bring their product to the market but have a very powerful parent company guide them in a direction that is beneficial to both parties.
The third leg of their innovation department is the JJDC. The JJDC works closely with JLABS. This is because the JJDC acts as the venture capital arm of Johnson & Johnson. Like all the other areas, they focus on pharmaceuticals, medical devices and consumer healthcare. Startups that are looking to be involved with the JJDC get the full treatment of the Johnson & Johnson company. The team behind JJDC helps startups deploy their full capabilities by assisting them in discovery, clinical development, regulatory affairs, manufacturing and commercialization. JJDC invests in startups within all aspects of the healthcare industry.
A recent successful investment was that of Thirty Madison, which aims to allow patients access to affordable virtual care for conditions like migraines and acid reflux. The point of this investment was to foster Johnson & Johnson’s presence in the telemedicine field, which has seen tremendous growth in the age of COVID-19. JJDC looks to invest in innovation that is futurist; able to solve a multitude of problems for people of all ages and backgrounds. Thinking ahead and developing solutions for ongoing problems are key factors of the stringent criteria that are set by the JJDC.
Janssen Business Development is the last area of innovation for Johnson & Johnson. Unlike the other two legs of innovation, the Janssen Business Development unit focuses on collaboration with mid-to-large companies or companies that are seeking merger and acquisition help. Companies that become involved in the collaborative process are well rooted in the healthcare industry, allowing Johnson & Johnson to collaborate on complicated problems without being involved in the growth and planning of a potential new product. The emerging technologies that are most focused on are cardiovascular diseases, immunology, infectious disease, neuroscience, oncology and pulmonary hypertension.
Johnson & Johnson does not have the most admirable brand image, especially among the US federal courts. With over 250 subsidiary companies, Johnson & Johnson has had plenty of encounters with the US penal system. As of September 2020, they have five pending lawsuits against them. These lawsuits cover a wide array of their products. Their most famous lawsuit, the Johnson Talcum Powder case, has sparked national coverage and garnered heavy news coverage.
The Johnson & Johnson talcum powder lawsuit has been in the courts for several years. The premise of the battle is that their powder was found to contain asbestos, which increased the risk of cancer - specifically ovarian cancer. Talc has been a controversial material for nearly 3 decades. In the early 1990s, condom manufacturers stopped using talc in their products due to concerns over ovarian cancer. In 2010, the World Health Organization found that there was a 30 to 60 percent increased risk of ovarian cancer from using talc powder. Not long after, the first lawsuit was filed by Deane Berg against Johnson & Johnson. She alleged that her use of their talc powder resulted in her developing ovarian cancer in 2006. Shortly afterward, in 2014, two class action lawsuits came down on Johnson & Johnson. In the years following judges have awarded tens of millions of dollars to consumers that have developed cancer from using Johnson& Johnson powder. As of October 2020, Johnson & Johnson has agreed to settle more than 1,000 talcum lawsuits at a cost exceeding $100 million.
The second lawsuit that made headlines in recent years was the legal debacle surrounding the Xarelto drug. Xarelto was a blockbuster drug thinner that was prescribed for a variety of conditions. Unfortunately, some of the more serious side effects related to this drug were internal bleeding, deep vein thrombosis and complication for surgical wounds. This resulted in over 20,000 lawsuits against Johnson & Johnson, all of which alleged Xarelto caused serious internal bleeding and in some instances death. One of the major points of evidence put forth by the plaintiff was evidence that the drug itself was not thoroughly researched for different age groups. Depending on the kidney function of the person prescribed the drug, some doses could become harmful and cause continuous internal bleeding. The only drug capable of stopping and healing damage caused by Xarelto’s excessive bleeding was approved in 2018 by the FDA. Unfortunately, this drug was not cheap, with wholesale prices reaching as much as $27,500. In order to settle the remaining lawsuits of Xarelto, Johnson & Johnson along with Bayer agreed to pay $775 million in retribution to the victims of bleeding caused by the drug.
About 70% of Johnson & Johnson sales come from their number one and number two global market share position. Although they are market dominant in many medical fields, they still have a heavy reliance on their core set of products. Johnson & Johnson has 26 products and services that gross over one billion dollars in annual sales. Twelve of those twenty-six platforms perform at an even higher level, producing over two billion dollars in annual sales each. These standout products are primarily centered around contact lenses, wound closures and trauma.
Zytiga is a core product of Johnson & Johnson that brings in over $3.5 billion in annual revenue. This product is a key drug crucial to prostate cancer treatment, and although it accounts for a huge percentage of their total annual sales the possibility of sales slipping has only become more of a reality in recent years. In 2018 companies such as AbbVie and Astellas introduced their own version of Zytiga. Facing biosimilar competition, the market share that Zytiga holds is projected to decline up to 25%. 2019 brought the first signs of this decline, with quarter two of 2019 seeing U.S. sales plummet by a massive 59%.
Johnson & Johnson has introduced many life changing drugs into the field of science. The problem is that their heavy dependency on these life changing drugs makes them susceptible to losing huge percentages of their profits to generic drugs. Generic drugs, once introduced, take a huge portion of the market share due to the lower price point they have in comparison to the original. Once the patent and exclusive hold on the core products expire, Johnson & Johnson will see the fierce competition on every one of their core products, which will drive sales down significantly.
Johnson & Johnson gets an immense cut of overall sales from the U.S market. In 2018, the U.S. market accounted for 41.9 billion, and in 2019 it accounted for 42.1 billion. Being dependent on the US market for more than 50% of their annual sales isn’t bad in and of itself, but Johnson & Johnson should look into expanding into emerging markets. Countries such as Brazil, India, Russia, Algeria, Argentina and many African and South American countries are poised to have enormous future market pharma revenues. According to McKinsey, it is projected that by 2025 the world’s emerging countries will be responsible for over $270 billion dollars in potential pharmaceutical revenues. China, with its consistently growing economy and massive population, will account for about $220 billion in potential pharmaceutical revenues by itself.
China has already received some exposure from the Johnson & Johnson brand. In 2011 Johnson & Johnson opened up an innovation center in the Suzhou Industrial Park. The goal of this business strategy was to research and create a more niche line of products designed to cater to the needs of the Asian healthcare market.
Focusing on second and third world countries may not seem beneficial at the beginning. As we know, Johnson & Johnson spends billions of dollars in research and development; obviously, a majority of their medical devices and prominent medication are unaffordable for the average citizen of a developing nation. If they were to lower prices to a point where those citizens can afford their medications, Johnson & Johnson has the ability to expand in these emerging markets and become the sole provider of medical and consumer drugs. In return, Johnson & Johnson would have access to something incredibly valuable - the data that they can gather from these places. Johnson & Johnson’s innovation hubs cater to region specific illnesses and needs. By gathering and analyzing data in markets that are not deemed profitable by other major pharmaceutical companies, they could get a head start in the development of many region-specific diseases.
The medical field is riddled with companies cultivating innovations and implementing solutions for current problems. Johnson & Johnson is no different from one of the biggest pharmaceutical companies in the world by market cap and revenue. Although it has been able to retain this spot for many years, advancements in technology have paved the way for many companies to enter this competitive field, even allowing a few to stand toe to toe with a titan like Johnson & Johnson. Some of the biggest competitors that Johnson & Johnson faces are equally reputable names such as Bayer, Procter & Gamble, Abbott and many others. With the ongoing pandemic caused by COVID-19, many pharmaceutical companies rushed to develop a vaccine. Pfizer is one of the few companies that has been able to create a vaccine that was 95% effective in its phase three trials. Johnson & Johnson has missed out on this opportunity, and the massive government contracts that come with it.
Since 1982 Johnson & Johnson has had ten major product recalls. The first product recall was in 1982 for Tylenol capsules. There was evidence that the capsules being laced with cyanide and had caused several deaths. From 2009 to 2011 several over-the-counter medicines were recalled for a variety of reasons - from containing metal shards, to being mixed with the wrong level of ingredients. In 2010 metal to metal hip implants were recalled for metal poisoning and lack of functionality, both of which required additional surgeries to fix. 2012 brought another set of complications for their medical device department as transvaginal mesh implants were found to perforate surrounding organs and cause severe pain. 2013 saw a recall on Motrin, a pain killer for babies, due to several samples testing positive for plastic contamination. 2019 brought the biggest recall on products as Johnson & Johnson pulled over 33,000 bottles of baby powder from the shelves after the FDA found asbestos in a sample.
Johnson & Johnson, due to their massive size, have opted to incorporate both models of growth into business. Since its inception, Johnson & Johnson has acquired 35 companies, ranging from small tech startups to insurance companies. Most recently they acquired Momenta Pharmaceuticals, a deal that was announced on August 19, 2020. Some other notable acquisitions are Actelion Pharmaceuticals, which had an estimated value of $29.54 billion, and Abbot Medical Optics, purchased for $4.33 billion.
It’s no surprise that Johnson & Johnson spend so much time and money acquiring companies. Gaining momentum in research is one of the most important aspects of thriving in the pharmaceutical world. New technologies are constantly developing, and Johnson & Johnson benefits from acquiring data and research through buying the companies rather than starting the research from scratch.
Organic growth is another key factor in their growth. In 2019 they spent $11.4 billion on research and development, which ranked them #7 in the U.S. and #10 globally for R&D spending. They were able to buy thirteen companies, reach 100 innovation deals and have nineteen new equity investments. By levering enterprise efficiencies and capabilities, Johnson & Johnson has been able to create a blueprint for extraordinary growth.
Johnson & Johnson has seen a steady increase in their annual revenue. From 2015 to 2019 they had an increase of almost $12 billion dollars. Through intense mergers and acquisitions, they have been able to gain new insights on developing new technologies to stay ahead of the game. Their incubators have allowed them to partner and sponsor upcoming new pharmaceuticals that Johnson & Johnson can introduce into their product line later on.
Long-Term debt seems to have spiked from 2015 to 2016, mainly due to acquisitions they have been making. In 2017 long-term debt reached a peak of $30.675 billion, but has been steadily going down. COVID-19 has negatively impacted their sales of medical devices, as surgeries have come to a standstill. In 2019 they had $6.383 billion in worldwide sales; in 2020 they’ve been able to reach only $6,150 billion.
A debt to equity ratio is deemed safe around 1 to 1.5. Johnson & Johnson, being in a very capital-intensive market sector, would be safe with a debt to equity ratio as high as 2. Hovering around 1.65, a decline from 1.67 in 2019, Johnson & Johnson is still well in safe territory. Although it has almost doubled in the past five years, increasing research and development costs can be attributed to this jump - along with the acquisitions they have been making.
Johnson & Johnson’s free cash flow has been fluctuating since 2005. In 2019 Johnson & Johnson had the highest recorded free cash flow with $17.883 billion. 2020 saw that number take a sharp decline down to $13.269 billion due to the onset of COVID-19. As consumer spending decreased and hospitals went on lock-down, many elective surgeries were canceled. This only leaves room for operations for the purposes of saving lives. This downslope is the reason they’ve seen a decline in their medical device and prescription medication profits.
Johnson & Johnson has been a dividend aristocrat for a very long time. Given that fact, it should be to no one’s surprise that their dividend continues to rise year after year. Financials show that COVID-19 has impacted the normal routine of the company, but their unspoken promise to the investors has been kept. Slight tribulations in cash flow and revenue should not be a worrying sign for dividend investors. Johnson & Johnson is on track to continue their annual dividend increase, as they have done consistently in the past.
Johnson & Johnson boasts a payout ratio of 50.56% based on this year’s estimate. This falls in the safe range of payout ratios, usually considered to be 30-50%.
Dividend investors should not be concerned about the impact COVID-19 has had on Johnson & Johnson. The financials this year were not as stellar as in previous years, but it’s prudent to remember that Johnson & Johnson is extremely aggressive in their business model. Every opportunity that they’ve had to acquire a company that they want, they’ve taken. Their incubators and research centers around the world have given them a leg up against the competition, and continue to do so consistently. They’ve made over 100 deals with early-stage startups, and continuously seek innovation and new business ventures. Looking at historical data on their dividends, a cut or suspension is not going to happen anytime soon.