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talc 02/06
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Debate over whether talc causes ovarian cancer continues
Jun 1, 2016 | WRBL
Opinions are mixed over whether talc or talcum powder increases a woman’s risk of ovarian cancer. A jury recently awarded 55 million dollars to an ovarian cancer survivor who said decades of talcum powder use made her sick. -
What To Do About Johnson & Johnson
Jun 1, 2016 | Seeking Alpha
By Thomas Hughes
Johnson & Johnson has a long history, 53 years, of steady dividend growth. Even so, the current yield is less than 3%. With earnings growth slowing and patents set to expire, is dividend growth enough to keep shares at current levels?
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Debate over whether talc causes ovarian cancer continues
Jun 1, 2016 | WRBL
Opinions are mixed over whether talc or talcum powder increases a woman’s risk of ovarian cancer. A jury recently awarded 55 million dollars to an ovarian cancer survivor who said decades of talcum powder use made her sick.
Johnson and Johnson, the company that makes baby powder, which many women say they use for personal freshness vows to appeal that verdict.
Dr. Sylvester McRae of OB/GYN Associates in Columbus weighs in.
“For women who choose to get rid of their talcum powder there are other alternatives such as corn starch and kaolin products so there are alternatives,” said Dr. McRae.
Dr. McRae also says there are no good studies that support the premise of the original report done in 1971.
“There have been attempts and people have looked at it unbiased and they have not been able to come to the same conclusion.”
He would say however that there may be a slight increased risk, but he’s not ready to tell his patients to stop using the product.
Dr. Daniel Cramer of Brigham and Women’s Hospital in Boston says there are risks.
“There have been about 20 epidemiologic studies suggesting an association,” said Dr. Cramer.
Johnson and Johnson said it will appeal two multi-million dollar verdicts. The company’s Chief Medical Officer defended the company’s use of talc.
“Based on the available data and a thorough review of our internal safety database, we are confident in our position that there’s no causal association between talc and ovarian cancer,” said Dr. Joanne Waldstreicher.
http://wrbl.com/2016/06/01/debate-over-whether-talc-causes-ovarian-cancer-continues/
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What To Do About Johnson & Johnson
Jun 1, 2016 | Seeking Alpha
By Thomas Hughes
SummaryJohnson & Johnson has a long history, 53 years, of steady dividend growth.
Even so, the current yield is less than 3%.
With earnings growth slowing and patents set to expire, is dividend growth enough to keep shares at current levels?
Johnson & Johnson (NYSE:JNJ) has a long history of dividend growth. The company has steadily increased the distribution, once per year, over the past five decades, and did it again this year. While earnings growth is expected to slow in the coming year, dividend increases are expected to continue... but will it be enough to keep investors interested?
As of the last earnings cycle, the company raised distribution by 6.7% to $0.80 quarterly, or $3.20 annually. The move, while good, was less than average and only brings the yield up to about 2.8%. Over the past 10 years, Johnson & Johnson has raised the dividend nearly 9% per annum. Current yield is greater than the broader S&P 500 average yield and the Dow Jones Industrial Average, but only marginally so, and with so many companies participating in rate increases and stock buybacks, is not quite as alluring to investors and analysts as it once was.
Growth Outlook Is Relatively Lackluster
Since the last report, earnings estimates for this year and next year have risen, but growth is expected to slow. On a quarter to quarter basis, earnings are expected to grow only 0.5% in the current quarter and then fall -2.3% in the next. 2016 estimates are calling for a 6.6% increase in earnings over 2015, and 2017 falls to only 5.9%.
In today's market, any growth is nothing to sneeze at, but when compared to the broader market and healthcare sector, these expectations are mixed, to say the least.
The S&P 500 (NYSEARCA:SPY) is expected to see growth of -4.8% in the current quarter and 0.8% for the year, both worse than JNJ. The healthcare sector is expected to see growth of 2.4% in the current quarter and 7.1% for the year, both better than JNJ. Looking out to next year, the S&P 500 is projected to grow earnings by 13.4%, with the healthcare sector at 10.6%, both well above projections for JNJ and raising the question of whether there are better places for your money.
Analyst Recommendations And Valuation
The average recommendation is a "Hold", with a consensus target near $117.50, but this does not belay the fact that analysts are downgrading the stock, not upgrading. Over the past month or so, two major analysts, BTIG and Standpoint, have issued negative ratings. Standpoint initiated with a "Sell", with the target at $94. BTIG downgraded from to "Neutral" from "Buy".
In terms of valuation, the company is trading at a P/E of 20X last year's earnings, a full point above the broad market and near historical high levels. On a TTM basis, P/E is closer to 18X and in line with the historical average. Looking to forward earnings, this comes down a bit, to near 17X, but is still above the broader market valuation of 16.8X.
When compared to others in the space, such as AstraZeneca (NYSE:AZN), AbbVie (NYSE:ABBV), Merck (NYSE:MRK), Pfizer (NYSE:PFE) and Abbott (NYSE:ABT), it is highly valued. In fact, only Abbott is currently carrying a P/E above that of JNJ. AZN is trading 7.23X earnings, ABBV at 13.97, PFE at 14.66, MRK at 15.5 and ABT at 18.8, suggesting that either JNJ is grossly overvalued or the sector is undervalued.
Some Things To ConsiderIn a March research report, Goldman Sachs analyst Jami Rubin upped her price target due to trapped value. She is calling for the company to break up in order to unlock that value, and based on the Q1 results, that may not be a bad idea. Results were good, but positive growth in pharma revenues was offset by negative growth in both the consumer and medical devices divisions. The BTIG downgrade mentioned earlier echoes this sentiment, as they see little chance of a significant addition to the medical devices segment.Over the next few years, the company is going to lose patents on several of its biggest revenue drivers including, Velcade (May 2017), Zytiga(December 2016) and Concerta (July 2017 and January 2018). These are not the sole providers of JNJ revenues, but do have a material impact, estimated at $3 billion annually (roughly 37% of pharma sales). To counter this, the company has increased R&D expenses to 16% of sales, with at least 10 pipeline drugs with expected FDA approval by 2019.The recent award of $82 million in damages for death due to talc exposure has set a dangerous precedent for the company. While the dangers of talc have been known/suspected for several decades, the St. Louis case has opened the door for the thousands of other complaints to reach trial. JNJ stands by its use of talc in feminine hygiene products and is appealing the verdict. This issue is far from over. If the company loses, it could be liable for billions in damages. The fact that documents suggest the company knew all along that talc was dangerous begs comparisons to General Motors' (NYSE:GM) ignition switch debacle.At the risk of getting political, I have to bring up Obamacare. It is likely that growth in the healthcare sector has been driven, at least in part, by expanded coverage and use of services, supplies and drugs. If the Republicans win and oust the Affordable Care Act, there could be a significant downturn in profits and revenue for JNJ and all healthcare companies.
Conclusion
Dividend coverage is good and distributions are less than 60% of free cash flow, so we can expect distributions to at least continue at current levels, if not get raised again next year. The problem is that the company is showing slowing growth expectations in the face of expanding expectations for the healthcare sector and the broader market.
Along with this, it also faces the loss of exclusivity with some of its major drugs, with no guarantee they can be replaced by pipeline projects. Also, the talc issue is yet to be resolved and has left the company in a very precarious state. If you can remember, General Motors spent a lot of money taking care of legacy issues related to its negligence over the ignition switch recall.
My conclusion: JNJ may be an attractive, well-established healthcare/medical company, but is not one I'm interested in owning. Dividend growth is good, but there are other places to find it in today's market without the risks inherent with this company. According to FactSet's Dividend Quarterly, there are seven sectors with higher yield and growth than healthcare, led by the financials, technology and consumer staples... and they all have better earnings growth outlook than Johnson & Johnson.
So, what to do about JNJ? If you don't own it, I don't think you need to. If you do, I would consider very carefully how long you intend to keep it, your cost basis, any profits and possibly hedging with a protective put.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
http://seekingalpha.com/article/3979267-johnson-and-johnson
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