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Published: February 24, 2010
In a highly uncertain environment, one
thing is clear.
The demand for health care will not merely continue...
It will dramatically increase in the years to come.
Health care has always been a "defensive" industry, as people
get sick no matter what the economy is doing. But worldwide
demographic trends have also made health care one of the fastest
growing industries as well.
This growth shows no signs of abating.
Demand for health care will dramatically increase because of one
simple fact. Older people require more health care than younger
people. And older people today represent a greater percentage of
the population than ever before.
People are living longer. The fastest-growing segment of the
world's population, in fact, is aged 65 and older. These people,
particularly the U.S. Baby Boomers born from 1946 to 1964, are
an enormous population bubble, a group of people beginning to
hit retirement age. In fact, U.S. citizens aged 65 and older are
expected to reach 20% of the population by 2030. .
In addition, as developing nations become wealthier, their
large populations will demand more and better health care.
How can investors' best position themselves to benefit from the
phenomenon?
With the trend toward health care so broad and far reaching,
there's no need to gamble. Stick with the best in class. That's
Johnson & Johnson (NYSE: JNJ).
JNJ is the world's largest and most diverse health-care company.
This New Jersey-based giant has been in business for more than
120 years, since Grover Cleveland's first term. The company
engages in the research, development, manufacture and sale of
health-care products through more than 250 entities in 60
countries.
Johnson & Johnson is the best way to take advantage of the
health-care trend. The company not only sells pharmaceuticals
but everything from medical devices as complicated as heart
stents to the simple, ubiquitous Band-Aid. JNJ is the epitome of
a blue-chip stock, a large, well-respected company with
worldwide sales of $63.7 billion in 2008.
Here are just a few things to like about the company.
- Management has achieved 26 consecutive years of earnings
increases. (The dividend has seen 47 consecutive years of
increase.)
- Its products are the best. Seventy percent of sales are from
products with a No. 1 or No. 2 market share.
- J&J has an unassailable financial position. It's rated "AAA"
by Moody's and Standard and Poor's (Not even Warren Buffett's
Berkshire Hathaway (NYSE: BRK-A) has an AAA rating.)
- The company is a strong innovator: A quarter of the products
it sold in 2009 were introduced in the past five years.
Most large pharmaceutical companies specialize. Johnson &
Johnson, uniquely, has a significant leadership role in three
health-care segments: pharmaceuticals (36% of revenue), medical
devices and diagnostics (38%), and consumer products (26%).
JNJ's pharmaceutical unit has several leading drugs, including
rheumatoid arthritis treatment Remicade. Consumer products
include household staples such as Listerine and Tylenol.
JNJ pays quarterly dividends. The per-share payout has been at
$0.49 since the second dividend of 2009. The stock has a solid
yield of 3.1%. J&J has increased the dividend each year for
nearly a half-century, and by an average of +11.1% during the
past five years.
JNJ is reasonably valued: Shares trade for less than 13 times
2010 projected earnings, well below its five-year average price
of more than 16 times earnings. It has beaten the market: While
the S&P 500 is lower than it was 10 years ago, JNJ has averaged
+5.7% per year in total return during the same period.
JNJ sports one of the best pipelines of drugs and products in
the industry and has an ever-expanding international presence.
Looking forward, the slow-growth economy combined with increased
demand for health care products should play well into JNJ's
hand.
The company is reasonably valued and should make an excellent
core holding and provide solid and predictable returns in the
uncertain years ahead.
-- Tom Hutchinson
Staff Writer
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