Johnson & Johnson (NYSE: JNJ) stock had a disappointing 2023, seeing its share price fall by 11%. In the year before that, the stock only generated a modest return of 3%. It's fair to say J&J has been an underwhelming investment.
While the stock is underperforming, Johnson & Johnson as a business is pivoting more toward growth of late. It spun off its consumer health business in 2023, and it has been spending money on acquisitions that can help boost its growth potential in the long run.
Given J&J's recent deals and its more modest valuation, is now the time to buy shares of this top healthcare company?
Johnson & Johnson aims for modest single-digit growth until 2030
Johnson & Johnson tightened its business focus in 2023 when it spun off its consumer healthcare division into Kenvue (it still owns a minority stake in the company). It now focuses on innovating and expanding its pharmaceuticals and medical devices divisions. J&J projects that between 2025 and 2030, its operational sales will rise by a compound annual growth rate between 5% and 7%. This year, it expects to grow between 5% and 6%.
Those are encouraging numbers for a diversified company that generated $99 billion in revenue over the trailing 12 months.
Acquisitions have played a key role in its growth strategy
One way Johnson & Johnson can enhance its growth is through acquisitions. By adding new products and revenue streams and broadening its pipeline, it can give itself room to expand even further.
Recently, the company announced it would be acquiring oncology specialist Ambrx for $2 billion in an all-cash deal. Ambrx makes antibody drug conjugates (ADCs) that target cancer cells. It is a clinical-stage company that focuses on cancers where there is a high unmet need. It won't bolster Johnson & Johnson's top line today, but can add to its pipeline. Ambryx's most advanced candidate is an ADC that targets breast cancer and other solid tumors, but it's only in phase 2 trials.
In 2022, Johnson & Johnson also acquired heart pump maker Abiomed for $16.6 billion in an effort to strengthen its medical device business. It enables the company to focus on a potentially attractive growth opportunity in cardiovascular care (specifically, heart failure and recovery).
Johnson & Johnson's strong financials allow the company to pursue even more deals ahead. Over the past four quarters, the company generated free cash flow of $15.7 billion, which is more than the $11.9 billion it has paid out in dividends during that time frame. It can use that excess cash to invest in its pipeline or potentially pursue more acquisitions as it looks to focus more on growth in the long run.
Investors shouldn't overlook the talc lawsuits
A big cloud that still looms over Johnson & Johnson is its talc-based baby powder lawsuits. There are more than 50,000 lawsuits the company faces, with plaintiffs alleging the products contained asbestos which led to them getting cancer. Johnson & Johnson attempted to resolve the issue by using a controversial strategy known as the Texas two-step, where it would put the liabilities into a subsidiary and bankrupt it, thus limiting the parent company's overall liability. The strategy has failed in the courts twice, and the threat to the business is a significant one.
In the past, the company paid out $2.1 billion in damages to 22 women who developed ovarian cancer allegedly due to the asbestos contained within Johnson & Johnson's products. Such a high payout may not be typical, but given that the company is facing tens of thousands of lawsuits, it's easy to see how it can be difficult if not impossible to estimate just how massive the liability may be for J&J.
Until the issue is resolved, it's going to be a risk that investors should factor into their decision-making process when deciding whether to invest in the stock.
Is Johnson & Johnson stock a buy?
Johnson & Johnson is one of the world's largest healthcare companies. It's diverse and it's growing at a modest rate. It even pays a dividend that yields around 3%. There are many positives about the business.
But what would prevent me from investing in the company is its potential multi-billion-dollar exposure from the talc lawsuits. It's the single biggest risk facing the J&J today. And while the odds are it won't destroy the business, it could still impact its growth potential and the resources it has available down the road to invest in its operations.
Johnson & Johnson has been an underwhelming investment in recent years, and I don't expect that to change. Investors are likely better off pursuing other healthcare stocks instead.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kenvue. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $13 calls on Kenvue. The Motley Fool has a disclosure policy.
