Earnings season in full swing

Well, for Chicago Blackhawk hockey fans, the boo birds were out in full force the other night as the three time Stanley Cup champions (3 times in the past 7 years) were blanked by Nashville on home ice 5-0. By the end of the game, the crowd seemed ready to lynch their “beloved” champs. Now, facing elimination, the Hawks must win four straight to keep the season going. Johnson and Johnson must feel a bit like my Blackhawks. Despite more than a hundred years of operating history, 54 consecutive dividend increases and being the most dominating business franchise in the healthcare sector, it took only a slight disappointment for the boo birds to wipe 3.6% off the JNJ stock value. Their earnings were above estimates and they provided higher guidance for the year overall, but revenues fell short ($17.7 billion vs. an expected $18.04 billion).

The pundits are out and the pronouncements are decidedly negative. One commented the stock is overvalued. Another mentioned that while they pay a nice dividend, they wasted money on share buybacks given that they issued so many options to senior executives, thus counteracting the purpose of a share buyback. Others are lynching JNJ for overpaying for the Actelion acquisition. I agree somewhat, as $30 billion is a nice chuck of change—but it’s too early to tell on this one. Other analysts remain hopeful. One journalist asked, “How would you like to own JNJ at a 5.0 percent yield?” He then launched into a discussion on dividend yield on cost and how their enviable track record of dividend increases will get you that yield if you buy now and wait a few years. I had to laugh because I have owned JNJ since 1993 (it’s a member of the In Sickness and Wealth personal portfolio at $10 bucks a share, and our dividend “yield on cost” is over 30%. Take that boo birds. (See our December 1, 2015 article on dividend yield on cost.)

Of course, when you have a 10 bagger it’s easy to sleep at night. With a ton of cash and an unheard of AAA credit rating (a rating shared by only 3 companies in the United States), I have no doubts Johnson and Johnson will do just fine going forward.

And when you find yourself doubting… just invoke the WWWBD slogan—what would Warren Buffett do???!! If I sold every time an analyst criticized JNJ, I would have left a nice chunk of net worth on the table. And if the wizard of Omaha would have done so with all his holdings—some held for four decades—he’d be worth a fraction of the $70 billion he’s currently worth. Hang in there. It’s a quarter. One lousy quarter out of a lengthy history (over a century). Despite all the negative press, the stock remains within striking distance of its all-time high. Be careful out there. Don’t be swayed by every opinion you read.

Stay tuned.

Dave Lerman and Jodie Warner


Leave a Reply