Buy Johnson & Johnson, despite scandal

Consumer goods stock Johnson & Johnson faces a public relations nightmare that could cost it billions. From a purely financial viewpoint, however, this global stock remains a buy.

US stock Johnson & Johnson (NYSE—JNJ), a blue chip stock and dividend aristocrat, faces a public relations nightmare that could cost it billions of dollars and damage its reputation.

Johnson & Johnson

According to Reuters, Johnson & Johnson knew since the early 1970s that small amounts of asbestos occasionally found its way into raw talc and J&J’s Baby Powder and Shower to Shower.

J&J’s Consumer segment produces a wide range of products, including Johnson’s Baby Powder. According to Reuters, in 2006 a branch of the World Health Organization started classifying cosmetic talc used in the Baby Powder as a “possible carcinogen” (that can cause cancer). J&J will find it difficult to claim that it was unaware of the risk. That’s because talc supplier Luzenac America started including that warning on its shipments to J&J.

Since at least the 1970s, pediatricians have warned parents to make sure that their infants did not inhale talc. Worse, according to Reuters, J&J knew since the early 1970s that small amounts of asbestos occasionally found its way into its raw talc, its Baby Powder and Shower to Shower (a powder brand). The company allegedly did not report this to regulators or the public. J&J says that the Reuters report is inaccurate and misleading. J&J e-mailed to Reuters that its Baby Powder is safe and asbestos free.

It sold to African-American, heavy, women

To offset falling sales for babies, J&J allegedly increased its marketing to African American and overweight women. Reuters writes that: “Adults have been the main users of Johnson’s Baby Powder since at least the 1970s.” In fact, adults consumed 91 per cent of Johnson’s Baby Powder by the middle of first decade of this century.

According to Reuters, African Americans and overweight women “make up a large number of the 13,000 plaintiffs alleging that J&J’s Baby Powder and Shower to Shower . . . caused their ovarian cancer”. The jury rendered a verdict of $4.69 billion against J&J. The company is appealing this verdict.

Even if J&J loses its appeal, it can absorb a verdict of $4.69 billion. After all, last year it earned a net profit of $16.88 billion (excluding one-time earnings). Indeed, the company is expected to earn $8.17 a share in 2019 (excluding one-time items from both years). That would represent earnings growth from $7.30 a share last year. The fact is, J&J produces a broad range of products across the world.

J&J was forthright and honest about Tylenol

When someone poisoned some of J&J’s Tylenol many years ago, the company built up trust. It immediately admitted that the problem was with some of its bottles of Tylenol. J&J fixed the problem by using tamper-proof lids on the bottles. (Many other companies followed in J&J’s footsteps.) At the time, J&J was commended for dealing with the problem in a forthright and honest way. It would be a shame if the company lost the trust of customers.

It’s also terrible that J&J targeted some of its marketing specifically to African Americans. This group represented 14 per cent of the population of the United States in 2010. A boycott of the company’s products by 42 million African Americans, and those that oppose racial targeting, could cost it sales. It could also sully its reputation.

Even so, from a strictly financial viewpoint, this dividend aristocrat remains a buy for long-term share price gains and decent dividends that have risen for 57 consecutive years.

This is an edited version of an article that was originally published for subscribers in the April 19, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.