What awaits Johnson & Johnson (JNJ) beyond consumer business spinoff

Johnson & Johnson (NYSE: JNJ) is probably the most diversified healthcare firm that owns several popular consumer brands, which have brought both accolades and brickbats to the company. It follows a strategy focused on taking measures to retain the growth momentum while also tackling challenges like consumer protection lawsuits.

Unlike the majority of its peers in the healthcare sector, Johnson & Johnson’s stock beat the market downturn and regained strength very fast. Though the shares started on a low note this week, they stayed close to their April peak. The New Brunswick-based company, which is preparing for a major organizational change, has a long history of dividend payments with regular hikes. The yield is one of the best in the market that keeps attracting income investors. The dividend was raised to $1.13 recently.

Historic Split

Last year, Johnson’s leadership revealed plans to spin off the consumer business and become two separate public companies. The split is expected to allow the company to focus more on its core business, while there are concerns about the growth prospects of the standalone entities post-separation. What makes the move significant is that it comes at a time when the company is embroiled in multiple lawsuits challenging the safety of some of its leading products and demanding compensation for allegedly causing serious health issues like cancer.

Currently, there seems to be little room for the stock to grow, and the valuation is not very cheap. Also, experts’ outlook on the upcoming spin-off is mixed. Considering these factors and the ongoing economic uncertainty, JNJ looks slightly risky. For investing in the stock, it would be a good idea to wait until things become more clear.

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Johnson & Johnson Q1 2022 Earnings Call Transcript

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To some extent, the company owes the stable sales performance during the market downturn to its COVID vaccine that shrugged off initial setbacks and hit the market early last year. Those tailwinds were partially offset by muted demand for medical devices due to the postponement of elective procedures in the COVID era.

Financial Performance

Despite being impacted by supply chain issues and raw materials shortages, the consumer division registered modest growth in the first quarter of 2022, when total sales increased 5% to $23 billion. At $2.67 per share, adjusted earnings were up 3% year-over-year. The management continues to expect full-year sales and profit to rise above the prior-year levels. When the company reports second-quarter results in the pre-market hours on July 19, investors will be looking for earnings of $2.57 per share, which is up 4% from last year. It is estimated that revenues have grown modestly to $23.82 billion in the current quarter.

From JNJ’s Q1 2022 earnings conference call:

“We anticipate announcing key executive leadership appointments for the new Consumer Health Company in the coming months with plans to provide the new company name and headquarters location around the middle of this year. In the second half of 2022, we plan to provide the updated path forward and applicable financial information such as refined standup cost estimates and potential short-term dis-synergies. Finally, consistent with previous communications, we expect to execute the separation in 2023.”

Risks

Besides the legal issues and compensation claims, rising inflation and weakening consumer sentiment can weigh on the business this year. Since continued re-investment in the business is putting pressure on the company’s finances, the key to maintaining growth would be effective cost management and continued innovation.

JNJ traded above its 52-week average this month, and constantly maintained the uptrend. The stock price is slightly above the levels seen at the beginning of the year. In the past six months, it gained about 4%.