Is Johnson and Johnson Still a Safe Play?

With shares of Johnson & Johnson (NYSE:JNJ) trading at around $69.61, is JNJ an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

A lot of people have been focusing on the negative for Johnson & Johnson recently. This is interesting considering Johnson & Johnson has been one of the safest investments for decades. The stock is up more than 2600 percent all-time, and there have been healthy dividend payments for the majority of that timeframe. Currently, the stock is yielding 3.40 percent.

With this kind of strong history, you might be wondering why so many people are turning negative on the company as of late. The biggest reason is that net income has been decreasing on an annual basis while the dividends have increased, which can lead to a dangerous convergence. However, Johnson & Johnson has an operating cash flow over $15 billion, a strong balance sheet, and wise management. To think that Johnson & Johnson might run into trouble because of a decrease in net income over the past two years and an increase in dividend payments is a quality example of paranoia.

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Another concern is that Warren Buffet has decreased his position in the company. Mr. Buffet is one of the greatest investors of all time, but it doesn’t mean you should sell shares in a company just because he did. Mr. Buffet has been playing it very conservative recently, which most likely has a lot to do with the fiscal cliff, not Johnson & Johnson.

A third concern is that Johnson & Johnson has spread itself to thin. At the risk of sounding insulting, this is somewhat laughable. Johnson & Johnson dominates its market on a global scale. There might be some up years and down years, but over the long run, it will be difficult to find a safer investment. There have indeed been litigation issues, product recalls, and factory shutdowns, but these types of issues often take arise when a company is the size of Johnson & Johnson.