Image Source: Johnson & Johnson
By Brian Nelson, CFA
On October 18, Johnson & Johnson (JNJ) reported mixed third-quarter results that showed adjusted operational sales growth of 8.2%, but adjusted earnings per share falling 1.9%. Negative currency impacts posed a stiff headwind to its ‘International’ operations, and we would expect this to be a recurring theme across multi-nationals during third-quarter earnings season. We’re sticking with Johnson & Johnson as one of the top weightings in the simulated Dividend Growth Newsletter portfolio.
On an adjusted operational basis (i.e. excluding currency headwinds and any acquisitions and divestitures), the company’s business remained resilient in otherwise what can be described as a very uncertain economic backdrop. Its ‘Consumer Health’ division experienced adjusted operational sales growth of 4.8% thanks to strength in its Neutrogena and Aveeno brands. ‘Pharmaceutical’ worldwide adjusted operational sales increased 9.2% during the quarter as Darzalex, Tremfya, Stelera, and other commercial drugs delivered. Its’ ‘Medtech’ division grew adjusted operational sales 8.1% in the period.
Looking ahead, Johnson & Johnson made a few tweaks to its full-year 2022 guidance. Adjusted operational revenue is now expected to advance 6.7%-7.2% (was 6.5%-7.5%) during the year, while adjusted diluted operational earnings per share growth is now targeted in the range to 9.2%-9.7% (was 8.7%-9.7%). J&J ended the third quarter with a modest net cash position of $2 billion after generating strong free cash flow. There were a few key takeaways across J&J’s divisions from its 3Q slide deck that are worth noting:
Pharmaceutical
Remain confident in our ability to grow sales every year toward our goal of $60B by 2025
Stelara loss of exclusivity (LOE) anticipated to occur in the second half of 2023 in the U.S.
MedTech
Impact from new products and commercial execution expected to enhance our competitiveness
Anticipating positive procedure trends, but some continuing market headwinds (supply and staffing constraints, VBP)
Consumer Health
Continue to utilize strategic price increases to offset inflationary pressures; expect reduction in supply chain disruptions
Macroeconomic and geopolitical environment remains dynamic (freight, energy prices, supply)
Johnson & Johnson likely won’t feel the impact of the weakening macroeconomic environment as much as others, but it will feel a punch from inflationary pressures in 2023 due to the higher costs of manufactured inventory and a stronger dollar, which will hurt results at multi-nationals to varying degrees in the coming quarters. Johnson & Johnson will also be spinning off its ‘Consumer Health’ division next year as Kenvue, and we’re excited to have a look at how the financials will shake out at that time for both independently-traded companies. We’re big fans of the company’s pipeline, and it’s quite something to see that management has visibility to grow ‘Pharmaceutical’ sales in each of the next several years.
Concluding Thoughts
Johnson & Johnson is one of the top weightings in the simulated Dividend Growth Newsletter portfolio, and it has delivered tremendous stability at a time when the markets are facing considerable pressure. Year-to-date, Johnson & Johnson’s share price has fallen about 4% on a price-only basis, while the S&P 500 is down more than 18% so far in 2022.
Macroeconomic uncertainty, inflationary pressures and currency headwinds will muddy operational results in the near term, and its planned spin-off of its ‘Consumer Health’ division as Kenvue in mid-to-late 2023 will complicate financials, but we still like Johnson & Johnson. Shares yield ~2.7% at the time of this writing.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.