Two holdings in the Dividend Growth Newsletter portfolio, Johnson & Johnson and Microsoft Corporation, are getting ready to report earnings later this month.
By Callum Turcan
Johnson & Johnson
Shares of Best Ideas Newsletter and Dividend Growth Newsletter portfolio holding Johnson & Johnson (JNJ) have experienced a sharp recovery since October 2019 and are trending up towards our fair value estimate of $151 per share. If Johnson & Johnson continues to perform well going forward, keeping in mind management raised the firm’s full-year guidance for fiscal 2019 several times (more on that here), shares of JNJ could test the upper bounds of our fair value estimate range which sits at $181 per share. Shares of JNJ yield ~2.6% as of this writing, and we view Johnson & Johnson’s dividend growth trajectory as stellar.
The company recently received some good news on the legal front as a Philadelphia judge reduced the punitive damages Johnson & Johnson was ordered to pay after losing a case over its Risperdal drug (an antipsychotic medication), bringing the figure down from a whopping $8 billion to $6.8 million. Johnson & Johnson is facing roughly 13,000 lawsuits over Risperdal allegedly causing gynecomastia in young males, which causes swollen breast tissue due to a hormone imbalance. Please note the plaintiff also had his compensatory damages reduced from $1.75 million initially down to $680,000 during a different phase of this legal process.
More broadly, we think it’s important to keep in mind that while the initial sticker price on some of these legal cases can appear daunting at first, usually most compensatory and punitive damage awards get revised down to arguably more appropriate levels. Additionally, Johnson & Johnson has come out swinging against allegations from the US FDA that the company’s talc-based Johnson Baby Powder product contains asbestos. Numerous tests conducted by third-party labs have rebuffed the FDA’s allegations (more on that here), as those tests did not uncover any sub-trace levels of asbestos in the allegedly contaminated lot of baby powder bottles.
We continue to like Johnson & Johnson heading into 2020 and will have more to say on the name after it reports fourth quarter earnings for fiscal 2019 before the market opens on Wednesday, January 22. The company’s investment grade credit rating and strong free cash flow profile will enable the firm to handle any major legal liabilities that may come its way.
Microsoft
Another Dividend Growth Newsletter portfolio holding is getting ready to report earnings soon, and that’s Microsoft Corporation (MSFT). The tech giant’s stock has been on an epic run since CEO Satya Nadella took the reins in 2014. As of this writing, shares of MSFT have jumped past the top end of our fair value range estimate, but we generally don’t remove holdings from our portfolio until their technicals turn against them. As MSFT continues to be supported by very strong technicals of late, shares of Microsoft could surge even higher and we want to capture that upside for our members.
Shares of MSFT yield ~1.2% as of this writing and like Johnson & Johnson, we view Microsoft’s dividend growth trajectory as stellar. Lloyds Banking Group (LYG) recently signed a deal with Microsoft as part of Lloyds’ plan to invest GBP£3.0 billion towards upgrading its digital infrastructure to bring its back-office operations into the 21st Century. The two companies have been working together under this strategic partnership since 2017, and it appears that relationship has blossomed into new business opportunities for the tech giant to capitalize on. Here’s what the press release had to say:
“The new partnership includes the development of Microsoft Managed Desktop, offering productivity tools within Office 365, the robust security capability of Windows 10 and an advanced device solution to support evergreen currency management.
LBG [Lloyds’ Banking Group] has worked with Microsoft since 2017 to build, test and evaluate the scale, security and agility requirements for Microsoft Managed Desktop. The rollout across the entire business makes it the world’s largest financial services firm to deploy this technology. This is supplemented by LBG’s use of Microsoft Azure to increase business agility, scalability on demand and provide a more enhanced customer offering.”
In other news, Microsoft winning the Joint Enterprise Defense Infrastructure (‘JEDI’) contract during the latter part of 2019 was a huge win for its cloud ambitions. That deal to help modernize the IT infrastructure for the US Department of Defense (‘DoD’) is worth up to $10.0 billion over ten years, with room for upside. While various companies are still contesting the awarding of that contract, it appears Microsoft will remain the victor as things stand today. We will have more to say on Microsoft after its latest earnings report.
Concluding Thoughts
We are very pleased with the performance of our Dividend Growth Newsletter portfolio and we published a piece back at the end of 2019 (link here) highlighting the portfolio’s simulated performance from January 1 to December 27 last calendar year. Furthermore, we made some big changes to our portfolios on January 13, 2020 as we are becoming a tad more defensive given how late we are in the current cycle of economic expansion, which members can read about here—->>>>
Software Industry – ADBE ADSK EBIX INTU MSFT ORCL CRM
Household Products Industry – CHD CLX CL ENR HELE JNJ KMB PG
Related: LYG
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Callum Turcan does not own shares in any of the securities mentioned above. Johnson & Johnson (JNJ), Microsoft Corporation (MSFT), and Oracle Corporation (ORCL) are all included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Johnson & Johnson is also included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.