Foolish Feature, 02/11/98: Stocks Fools Love, Johnson & Johnson, by Deborah Tidwell

Stocks Fools Love
February 11, 1998

Johnson & Johnson
by Deborah Tidwell (TMF Debit)

Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
http://www.jnj.com
$68 7/8 as of February 9, 1998

Johnson & Johnson has been the stock I love year after year. To give you an idea why this stock has such staying power in my heart and portfolio: "Johnson & Johnson, with over 90,500 employees, is the world's largest and most comprehensive manufacturer of health care products serving the consumer, pharmaceutical, diagnostics, and professional markets. The Johnson & Johnson Family includes 180 companies in more than 51 countries around the world, selling products in more than 175 countries." This is the kind of love that makes your mom pull out the good china. In fact (cleverly disguised disclaimer), Johnson & Johnson proudly sits in all 3 of the stock portfolios I pay attention to, including my mom's.

Jeff Fischer and Randy Befumo wrote about Johnson & Johnson's prospects and fundamentals in their analysis of healthcare companies for the Drip Portfolio (and they decided to buy Johnson & Johnson for the long haul, too). Their numbers are based on 1996 annual results available at the time.

Johnson & Johnson recently announced 1997 results that featured earnings growth of 13.8% on a sales increase of 4.7%. The net income margin for 1997 was a record 14.6%, up from 13.4% in 1996. The three business areas continued to account for roughly one-third of total sales each, with Pharmaceuticals at $7.7 billion, Professional Products at $8.4 billion, and Consumer Products at $6.5 billion. The two higher-margin areas (Professional and Pharmaceutical) grew faster than the Consumer Products area -- 8.4% and 11.9% respectively, versus 5.6%. (Note: percentages do not account for currency impact of the stronger dollar.) The company continues to plow money into research and development. R&D investments totaled $2.1 billion or 9.5% of sales in 1997. 1997 was also the 35th consecutive year the company increased its dividend -- from $0.735 per share in 1996 to $0.85 in 1997, a 15.6% increase.

The company has 64 years of consecutive sales increases, 35 consecutive years of net income increases, and 53 continuous years of dividend payments. Over the past 10 years, it has average annual sales growth of 11.9%, earnings per share growth of 15.8%, dividend growth of 15.8%, and total return to shareholders of 22.2%. Each year and in total from 1991 to the end of 1996, Johnson & Johnson stock has beaten the S&P Diversified Healthcare Index in terms of total shareholder return.

It has major drugs with long patent lives. Of the 90+ drugs marketed, more than half have sales above $50 million, and 19 of those are over $100 million. Its broad geographic reach allows the company to rapidly introduce new products worldwide.

Many people talk about Johnson & Johnson's strong brand names and cite Acuvue, Band-Aid, and Tylenol. Johnson & Johnson also has the Pepcid AC, Mylanta, Retin-A, Motrin, Neutrogena, and Imodium brands.

The Tylenol product line has been extended to include Tylenol Flu, Tylenol Cold, Tylenol Sinus, Tylenol Severe Allergy, a Children's Tylenol line in similar categories, and several Tylenol products for pain and fever. The Tylenol line alone is estimated to bring in more than $1.3 billion in revenues per year to Johnson & Johnson. Tylenol has more than double the market share of any other single analgesic and dominates that market even though generic acetaminophen is available to consumers at about half the price. The U.S. advertising budget for Tylenol alone is estimated to be around $250 million per year -- more than Coca-Cola spends on Coke.

A few pharmaceutical brands that you may also be familiar with include Floxin, Propulsid, Hismanal, and Ortho-Novum. The company's One Touch II line of glucose monitoring products are well known to diabetics.

I appreciate and review the fundamentals periodically and watch the earnings growth and numbers, but pure numbers don't spell out an important aspect of what I think makes Johnson & Johnson a truly great company -- everything it does is guided by a strict set of moral and ethical standards. The philosophy by which the company is run was written by Robert Wood Johnson in 1943, based on Try Reality, a pamphlet he wrote in 1935 in which he challenged industrialists to act responsibly toward their customers, employees, community, and stockholders. The JNJ Credo has formed the basis for the everyday decisions each employee at the company makes and sets the standards to which all employees are held. Employees review how well they and the company perform the responsibilities outlined by the Credo. Shortcomings uncovered are corrected.

There are a lot of reasons to love Johnson & Johnson.

Next Stock Fools Love: Linear Technology

* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.