Until a couple of days back, we could only speculate on the impact of COVID-19 on the economy. Of course, the record unemployment claims and increased demand for loans had given us a rough sketch of what to expect, but the earnings season will offer more conclusive evidence of the economy’s trajectory.
There was a hitherto unseen interest as Johnson & Johnson (NYSE: JNJ) reported quarterly results earlier this week for two reasons – it was one of the earliest companies to report this quarter’s results; and the company belongs to the healthcare sector.
Johnson & Johnson enthralled the market with its Q1 2020 performance. Not only did the top- and bottom-line results surpass market estimates, the company went upstream with its decision to hike dividends. This comes in the backdrop of over 70 companies already announcing a suspension or cut in quarterly dividends in order to drive liquidity.
As you might already be aware, the company is a Dividend King and the latest hike was its 58th consecutive year of increase. A company becomes a Dividend King when it raises dividend continuously for a minimum of 50 years. Investors were closely watching whether the management would forego this status in view of the unprecedented market situation. However, that wasn’t the case. During the post-earnings conference call, CFO Joseph Wolk made it clear that the company’s liquidity continues to be strong despite the lockdowns. He said:
“From a liquidity standpoint, we are very well-positioned. We ended the first quarter with cash and marketable securities of $18 billion, generating approximately $3 billion of free cash flow in the quarter. Coupled with our AAA credit rating, we are able to access the capital markets if needed and would anticipate securing the most competitive credit spreads available.”
Closing in on COVID-19
During the conference call, the management once again stressed on its research to find a treatment for COVID-19. The company has identified a lead candidate and two backups and Phase 1 trials are projected to start in September. If the tests and trials go as planned, Johnson & Johnson vows to produce 600 to 900 million doses of the drug by around this time next year.
Many other companies have already initiated tests to find a vaccine or treatment for the novel coronavirus pandemic, so it’s too premature to place investment bets as yet. However, decades of experience and a thick wallet to purchase promising firms definitely give JNJ an edge. Wolk reaffirmed his faith in M&A strategy during the call with analysts. He said:
“Our next priority is to invest our capital in value-creating M&A, pursuing transactions that bolster our portfolio or enhance our pipeline while targeting returns that compensate shareholders for the risk we are bearing on their behalf. The current crisis does not reduce our desire to do these transactions. In fact, given our financial strength, we may be in a better position to fund opportunities that will augment sustainable long-term growth.”
Two sides of the pandemic
During the quarter, the New Jersey-based healthcare company has both been benefited and hurt by the pandemic. Its largest business of making medical devices saw its revenues fall 8% as hospital resources were deferred to meet the pandemic crisis. On the flip-side, fear-induced hoarding helped the Consumer and Pharmaceutical segments, both recording approximately 9% year-over-year growth.
So does that mean we might see a downward impact in the current quarter? Responding to this question raised by Morgan Stanley analyst David Lewis, Wolk said:
“I would say you could probably expect that in our Consumer unit. You saw significant stocking across the globe. It probably, as Chris referenced, was about 7 points of additional growth for the Consumer franchise. We were off to a good start, but then you saw the benefit of pantry loading. I would say in form, remains to be seen.”
In the retrospect, Johnson & Johnson presented an opportunistic picture as it addressed analysts on Tuesday. The call went longer than usual as per the directive of SEC to be more specific about matters relating to the pandemic. CEO Alex Gorsky not only managed to lift the sentiments on the firm but also to some extent, the overall mood of the economy as well.
The sentiment showed in the stock movement. JNJ stock has gained over 5% since the announcement of the results. Earlier this year, the stock had tumbled over 27% as part of the market-wide crash. Meanwhile, the S&P 500 index was pushed up almost 3% after the JNJ announcement, following a 33% decline earlier this year.
To get more insights about the firm, read the full conference call transcript here. It’s free.
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